(JortipU ICam ^rljool Kthtaty

Cornell University Library
KF6301.A4 1917

Regulations no. 33 (rev.)

3 1924 020 019 307

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TREASURY DEPARTMENT
UNITED STATES INTERNAL REVENUE

REGULATIONS NO. 33

(REVISED)

GOVERNING THE COLLECTION OF THE

INCOME TAX

IMPOSED BY THE A^CtT OF SEPTEMBER 8. 1916
AS AMENDED BY THE ACT OF OCTOBER 3. 191 7

WASHINGTON
GOVERNMENT PRINTING OFHCE

ADDITIONAL COPIES

«* THIS PUBLICATION MAY BE PEOCITRED FSOK

THE SUPESraTENDENT OF DOCUMENTS

GOVERNMENT PRINTING OWIOE

■ffASHUJOTON, D. C.

AT

tS CENTS PER COPY

LETTER OF PEOMULGATION.

Treasury Department,
Office of Commissioner of Internal RE^'ENUE,

Washington, D.C, January 2, 1918.
The following regulations are hereby promulgated for the infor-
mation and guidance of internal- revenue officers and taxpayers under
the authority of acts of September 8, 1916, and of October 8, 1917.

Daniel C. Roper,
Commissioner of Internal RevcnMe.
Approved :

W. G. McAdoo,

Secreta'ry of tJie Treasury.

g INCOME TAX.

be accounted for as f dr the year of the maturity of the share for both
the normal and additional tax.

19 Commissions paid salesmen, — Are income to the salesmen as well as
expense to the payer.

20 Com|)ensation. — For service paid for on a percentage of net profits
is income to the employee, and to be accounted for as such. ,

21 Compensation not paid in money .-^-Where service is rendered for a
stipulated price, wage, or salary and paid with something other than
money, the stipulated value of service in terms of money is the value
at whicli tlie tiling taken in payment is to be considered for the pur-
pose of the income tax.

22 Where there is no stipulation as to the value of service and pay-
ment for service is made with something other than money, the
market or reasonable value of the thing taken in payment is the
amount to be included as income for the purposes of the income tax.

23 Executors and administrators, — If the net income of a decedent from
January 1 to the date of his death within that year was $1,000 or
over, if unmarried, or $2,000 or over if married, a return for such
decedent must be made by the executor or administrator, and such
executor or administrator may claim all deductions and exemptions
to which the decedent would have been entitled under the law.

24 Executors and administrators whoso duty consists of administer-
ing on an estate for the purposes of its distribution to heirs or lega-
tees are, during the period of such administration, held to stand in
the stead of their principal, and under the provisions of section 2(6),
act of September 8, 1916, are required to make returns of income for
the estate and to pay the tax shown by such return to be due.

25 Damages. — Amount received as- the result of a suit or compromise
for personal injury, being similar to the proceeds of accident in-
surance, is to be accounted for as income.

26 Dividend from depletion reserve. — A reserve set up out of gross re-
ceipts and maintained by a corporation for the purpose of. making
good any loss or v/asting of capital assets on account of depletion is
not to be considered a part of the earned surplus of the company,
but a reserve for the return or liquidation of capital. A dividend
paid from such reserve will be considered a liquidating dividend,
and will not constitute taxable income to the stocldiolder except to
the extent that the amount so received is in excess of the capital
actually invested by the stockholder in th& shares of stock held by
him, and with respect to whicli the distribution was made. No divi-
dend will, however, be deemed to have been paid from such reserve
except to the extent that such dividend exceeds the surplus and un-
divided profits of the corporation at the time of such payment, aad
unless the books, records, published statementSvetc, of tile corpiora-
6ion clearly indicate a corresponding reduction of capital assets
resulting from such payment.

IKOOME TAX, 9

Bividends paid with seoimties. — ^Dividends declared by a corpora- 27
tion and paid with securities in which the surplus of the corporation
has been invested, regardless of the character of such securities, is
to be accounted for as a dividend for income-tax purposes by the
recipients of same to the extent that it represents a distribution of
surplus accrued to the corporation since March 1, 1913.

Stock dividends. — Stock dividends declared from a surplus created 28
from the revaluation of capital assets or a value placed upon trade-
mark, good will, etc., do not represent a distribution of earnings or
profits subject to tax in the hands of the recipient shareholder. The
entire proceeds derived by a shareholder from the sale of such stock
is income subject to both the normal and additional tax and shall be •
accounted for in the shareholder's return rendered for the year in
which sold.

Farm. — ^The term "farm" as herein used embraces the farm in the 29
ordinarily accepted sense, plantations^ ranches, stoclc farms, dairy
farms, poultry farms, fruit farms, truck farms, and all lands used
for similar purposes ; and for the purposes of this decision all per-
sons who cultivate, operate, or >manage farms for gain or profit j
either as owners or tenants, are designated as " farmers."

All gains, profits, and income derived from the sale or exchange 30
of farm products, whether produced on the farm or purcliased and
resold by a farmer, shall be included in the return of income for the
year in which the products were actually marketed and sold; and
all allowable deductions, including the legitimate expenses incident
to the production of that year or future years, may be claimed in the
return of income for the tax year in which the right to such deduc-
tions shall arise, although the products to which such expenses and
deductions are incidental may not have been sold or exchanged lor
money, or a money equivalent, during the year for which the return
is rendered.

Eents received in crop shares shall likewise be returned as of 31
the year in which the crop shares are reduced to money or a money
equivalent, and allowable deductions likewise shall be claimed in
the return of income for the tax year to which they apply, although
expenses and deductions may be incident to products which remained
unsold at the end of the year for which the deductions are claimed.
iV7hen farm products are held for favorable market prices, no deduc-
tion on account of shrinkage in weight or physical value or losses by
reason of such shrinkage or deterioration in storage shall be allowed.

Qbst of stock purchased for resale is an allowable deduction under 32
the item of expense, but money expended for stock for breeding pur-
poses is regarded as capital invested, and amounts so expended do not
constitute allowable deductions, except as hereinafter stated.

10 INCOME TAX.

33 Where stock has been pui^chased for any purpose and afterwards
dies from disease or injury or is killed by order of the authorities
of a State or the United States and the cost thereof has not been
claimed as an item of expense, the actual purchase price of such
stock, less any depreciation which may have been previously claimed,
may be deducted as a loss. Property destroyed by order of the
authorities of a State or of the United States may in like manner
be claimed as a loss; but if reimbursement is made by a State or the
United States, in whole or in part, on account of stock killed or
property destroyed^ the amount received shall be reported as income
for the year in which reimbursement is made.

34 The cost of farm machinery is not an allowable deduction as an
item of expense, but the cost of ordinary tools may be included under
this item.

35 Under paragraph 7 of section* 5 (a), act of 1916, providing for
" a reasonable allowance for the exhaustion, wear, and tear of prop-
erty arising out of its use or employment * * *," there may be
claimed a reasonable allowance for depreciation on farm buildings
(other than a dwelling occupied by the owner), farm machinery, and
other physical property, including stock purchased for breeding pur^
poses, but no claim for depreciation on stock raised or purchased for
resale will be allowed.

36 A person cultivating or operating a farm for recreation or pleasure,
on a basis other than the recognized principles of commercial farm-
ing, the result of which is a continual loss from year to year, is not
regarded as a farmer. In such cases if the expenses incurred in con-
nection with the farm are in excess of the receipts thei-efrom, the
entire receipts from sale of products may be ignored in rendering a
return of income, and the expenses incurred being regarded as per-
sonal expenses, will not constitute allowable deductions in the return
of income derived from other sources.

37 An individual engaged in raising and selling stock (cattle, sheep^
horses, etc.) , is not entitled to claim as a loss the value of such animals
raised as die. The cost of raising will have been taken as an expense
deduction. In the case of animals purchased, which die, the amount
of purchase money will be an allowable deduction, if not previously
deducted as a business expense.

38 In case of sale the total amount received for stock raised and for
stock purchased for resale is to be accounted for as income.

39 Orchards and ranches. — Amounts expended in the development of
orchards and ranches -prior to the time when the productive stage is
reached constitute investments of capital.

40 Bonus. — ^Where common stock is received as a bonus in considera-
tion of the purchase of preferred stock, the entire proceeds derived

INCOME TAX. .11

from the sale or transfer of such stock is income subject to the
normal and additional tax.

Gifts. — ^The fair market price or value of stock acquired by gift 41
subsequent to March 1, 1913, is the basis for computing gain derived
or loss sustained by the sale thereof. If acquired by gift prior to
March 1, 1913, the fair market price or value as of that date is the
basis for computation.

Interest on exempt bonds, corporation. — Interest on Statg, miyiicipal, 42
&nd United States bonds received by corporations is not taxable to
the corporation. Upon amalgamation with other funds of the corpo-
ration such income loses its identity. When distributed to stot^'
holders as a dividend, the eritire amount of the dividend is subject to
inclusion in returns of income for the purposes of the income tax.

The foregoing holds true for scrip payment of interest. 48

Value of property acquired by inheritance. — ^The appraised value at 44
the time of the death of a testator is the basis for determining gain
or profit upon sale subsequent to the death after March 1, 1913.

Insurance. — Where insured receives, under any form of life insur- 45
ance, an amount in excess of premiums paid for the insurance, such
excess has a taxable status and is to be accounted for as for tha
calendar year of its receipt.

Xife insurance. — Dividends on paid-up policies are in the nature of 46
corporate dividends and are to be accounted for as income for the
purposes of the additional tax only.

Officer or employee of a State. — ^An individual who enters into a 47
contract with a State, or any political subdivision thereof j for the
doing of a thing or things specified by the contract, the completion of
which will constitute a fulfillment of the contract on the part of such
individual, is not an officer or employee of the State or political sub-
division thereof within the meaning and intent of section 4 of the
income-tax law and the amount received by him from the State
or political subdivision thereof under the ternii* of the contract is
to be accounted for as income.

Partnerships. — ^It is held that the income of a partnership accrues 48
to the individual partner at the time his distributive interest is de-
termined. In the returns of income made by individuals for the
calendar year there should be included such incomes accruing from
the business of partnerships for the business years of the pjirtner-
fihips as may have been definitely ascertained by means of a book
balance, whether distributed or not. Members of partnerships are
required to make returns of income, as individuals, for the calendar
year, and should include in their returns of income their interest in
partnership profits ascertained at the end of the business year fall-
ing within the calendar year for which the individual return is
being rendered. (See. art. 30.)

12 INCOME TAX.

49 Pensions.— Pensions paid by the United States, private institutions,
or individuals are to be accounted for, for income tax purposes, in
all cases where income of the pensioner is liable for income tax.

50 Permanent improvements under lease or rental contracts. — ^When im-
provements become a part, of real estate, the difference between cost
of the improvements and allowable depreciation during the lease
term is gain or profit to the lessor at the end of the lease term and is
to be accounted for as income at that time. (T. D. 2442.)

51 Eeceipt basis. — ^Actual receipt is a reduction to possession. Con-
structive receipt is where income is credited to or made available to
recipients and is to be reported as income; as credit to account of
recipents of savings-bank interests, etc.

52 In the case of compensation for service rendered, where no deter-
mination of compensation is had until the completion of the service,
the amount received in consideration of the service is income to be
accounted for as for the calendar year of its receipt.

53 Where the service and payment period is divided by the end of the
taxable year, the compensation for the period so divided r.t the end of
the year will be accounted for as 'income for the year in which pay-
ment is actually received. Where ithe service is compensated by fee, or
is of such nature that no part of the fee or compensation becomes
due until the completion of the service, the entire amount received
should be income to be accounted for as for the year of receipt.

54 'A person having a salary by the year and in addition commissions
on sales, the salary to be paid at the time commissions are determined,
and the determination of commissions is in? the succeeding calendar
year, the entire amount of salary and commissions should be ac-
counted for as income of the calendar year of receipt.

55 Reimbursement. — Per diem allowance in lieu of subsistence while
under traveling orders ; the total allowance is income and there may
be taken as a deduction for expense the amount actually expended
from such allowance for actual necessary traveling expenses.

56 Renewal premium. — Commissions on renewal premium for insur-
ance received by agents on account of business written is income
to be accounted for as such and for the calendar year of its receipt.

57 Kent. — ^Amounts expended by tenants for taxes and neeessai-y re-
pairs under agreement, in addition to a stipulated cash rental, are
items of taxable income, and as such should be reported in the return
of the landlord. A corresponding amount may be deducted by the
landlord.

58 Retired pay. — ^Retired pay of Army and naval officers and judges
of United States courts is subject to the income tax.

59 Royalty. — ^Royalty paid to a proprietor by those who are allowed
to develop or use property, or operate under some right belonging to
him, is to be accounted for as income.

INCOME TAX, 13

Profit from the sale of stock.— When stock is sold from lots purchased 60
at different times and at different prices and the identity of the lots
can not be determined as to dates of purchase, the stock sold shall be
charged against the earliest purchases of such stock. The difference
between cost and amount realized on the sale will be the profit to be
accounted for as income if the purchase was on or after March 1,
1913. Profit deHved from the sale of stock purchased prior to March
1, 1913, is the difference between the fair malrket price or value as
ef that date and .the selling price.

Sale of rights.^-Amount realized from sale of rights to subscribe 61
to stock is held to be income to the seller.

Sale of stock. — ^When a nonresident ialien who owns stock in an 62
American corporation disposes of same by sale, the sale and delivery
being made within the United States, the profit will be held to have
been derived from sources within the United States and is to be in-
cluded for the purposes of income tax.

Value as of March 1, 1913, method of determining.— No method of 63
determining this value can be stated by the department which will
adequately meet all circumstances. What that value was is a ques-
tion of fact to be established by any evidence which wUl reasonably
and adequately make it appear.

EXEMPT lUCOME.

Art, 5. There shall not be included as income^ 64

(a) The proceeds of life-insurance policies paid to beneficiaries 65
upon the death of the insured.

(&) Amount received by the insured, as a return of premium or 66
premiums paid by him under life insurance, endowment, or annuity
contracts, either during the term or at the maturity of the term men-
tioned in the contract or the surrender of the contract.

(c) Value of property acquired by gift, bequest, devise, or descent 67
(but income from such property shall be reported as income).

(cf) Interest on obligation^ of a State or any political subdivision 68
thereof.

((?) Interest on oTsligations of the United States (but, in the case of 69
obligations of the United States issued after September 1, 1917, only
if and to the extent provided in, the act authorizing issue thereof),*
or its possessions.

(/) Interest on securities issued under provisions of Federal farm 70
loan act, July 17, 1916.

(g) Compensation of all officers and employees of a State or any 71
political subdiyision thereof except when such compensation is paid
by the Uiiited States Government, '

'Interest from Bnited States bonds and certificates, authorized by tbe act of Septem-
ber 24, 1917, In excess of the interest on an aggregate principal amount of ?5,000 of such
bonds and certificates in one ownership must be reported for the pui^pose of the graduated
additional income. tax.

14 INCOME TAX.

7)& (A) For purposes of income tax under act of October 3, 1917, the
compensation of ttie President of the United States for the term for
which he is elected, beginning March 4, 1917 (such compensation
being subject to tax under the act of Sept. 8, 1916). Compensation
of all judges of the supreme and inferior courts of the United States
in office September 8, 1916, and October 3, 1917, compensation of
judges of these courts appointed subsequent to September 8, 1916,
being subject to tax under act 'of that date but not under act of
October 3, 1917; and compensation of judges of such courts ap-i
pointed subsequent to October 3, 1917, being subject to tax under:
both acts.

73 Art. 6. Net income is the difference between gross income and the
sum of allowable deductions.

DEDUCTIONS.

74 Art. 7. Citizens and resident aliens are given the deductions and
credits provided by section 5 of the act of September 8, 1916, as
amended by the act of October 3, 1917.

7j Nonresident aliens are given deductions and credits as provided
by section 6 of that act.

CITIZENS AND RESIDENT ALIENS.

76 Art. 8. The deductions provided by section 5 of the law are :

77 First. Necessary expenses actually paid in carrying on any busi-
ness or trade, not including personal, living, or family expenses.

78 Second. Interest paid'within the year except that paid on indebted-
ness for purchase of obligations or securities, the interest on which
is exempt from income tax.

79 Third. Taxes : State, or any political subdivision thereof. Federal
or foreign (except income and excess profits taxes paid to the United
States) , a,nd not including taxes assessed against local benefits.

80 Fourth. Losses sustained during the year, incurred in his business
or trade, or arising from fires, storms, shipwreck, or other casualty
and from theft, when such losses are not compensated by insurance
or otherwise.

81 Fifth. Losses actually sustained during the year in transactions
entered into for profit but not connected with his business or trade
to the extent of but not exceeding the profits arising from such
transactions.

82 Sixth. Debts due to taxpayer actually ascertained to be worthless
and charged off within the year.

83 Seventh. Depreciation in an amount representing exhaustion from
wear and tear of property arising out of its use or employment in
business or trade, but no deduction shall be allowed for any amount
paid out for new buildings, permanent improvements or betterments

INCOME TAX. 15

to increase the value of any property or estate, and no deduction shall
be made few any amount of expense of restoring property or making
good the exhaustion thereof for Trhich an allowance is or has been
made. (See arts. 159, seq.)

The value to be cared for by depreciation is the actual amount in- 84
vested in the property and not the value which may. be arbitrarily
or otherwise fixed.

Eighth. Depletion : An allowance representing amount of invested 85
capital in quantity of oil, gas, or mineral extracted through wells
and mines.

Depletion oil and gas wells. — ^Depletion or return of capital invest- 86
ment in the case of an individual ownf.r or lessee will be calculated
in the same manner as provided for corporate owners or lessees.
(See arts. 170, 171 and 172.)

Ninth. Contributions or gifts, not in excess of 15 per cent of tax- 87
able net income, made within the year to corporations or associa-
tions organized and operated exclusively for religious, charitable,
scientific, or educational purposes, or to societies for the prevention
of cruelty to children or animals, no part of the net income of which
inures to the benefit of any private stockholder or individual.

" Taxable net income " as used in section 5a, ninth deduction, is 88
construed to mean gross income, less deductions (except ninth deduc-
tion above) and less excess-profits tax, if any.

In connection with claim for this deduction on returns of income °°
there shall be stated : ,

(a) The name and address of each organization to which a gift 90
was made.

(&) The date and amount of the gift in each case. 91

Where the gift is other than money, the basis for calculation of ^^
the value of the gift shall be the fair market value of the property
the subject of gift at the time of the gift.

RULINGS AS TO DEDTJCTIONS UlTOER ARTICLE 8.

Bad dehts — Compromise. — Where an indebtedness is claimed and 93
contested and a settlement is had by way of compromise whereby
an amount, less than the debt claimed, is accepted in full payment
and satisfaction of the debt, the difference between the amount paid
and that claimed is not allowable as a deduction for bad debts.
Where the settlement in compromise consists of a promise to pay
an amount less than the debt claimed, the amount promised to be
paid forms the basis of a new transaction, and. upon failure to make
good this promise the question will arise as to the deductibility of
the ncw^ amount only.

16 INCOME TAX.

94 Bad debts. — Where all of the surrounding and attendant circum-
stances indicate that a debt is worthless and uncollectible and that
legal action to enforce payment would in all probability not result
in the satisfaction of execution on a judgment, a showing of these
facts will be sufficient showing of the worthlessness of the debt for
purposes of deduction.

95 Bad debts. — A bad debt or worthless debt, as contemplated by the
income-tax law and which may be deducted in a return of income,
is a debt which has been actually ascertained to be worthless and
charged off within the taxable year.

96 Bad debts. — ^Debts arising from unpaid wages, salaries, rents, and
items of similar taxable income will not be allowed as a dedviction
unless the income they represent has been included in the return of
gross income for the year in which the deduction as a bad debt is
sought to be made or in a previous year and the debts themselves
have been actually ascertained to be worthless and charged off.

97 Bad debts — Bankruptcy. — Bankruptcy may or may not be an indi-
cation of worthlessness of a debt. Actual determination of worth-
lessness in such. cases is possible o»iy when settlement in bankruptcy ,
shall have been had. Only the difference between the amount re-
ceived in distribution of assets of the bankrupt and the amount of
proved claim may be considered for the purpose of deduction as a
bad debt.

88 Bad debts — ^Foreclosure sale on a mortgage, — Where, under fore-
closure, a mortgagee buys in the mortgaged property and credits the
indebtedness with the purchase price the difference between pur-
chase price and the indebtedness will not be allowable as a deduc-
tion for bad debt — the property which was security for the debt
being in possession and ownership of the mortgagee is, for the pur-
poses of income tax, held to be sufficient to justify a disallowance
of a claim for bad debt.

99 Only where purchaser for less than debt is another than mortgagee '
may the difference between debt and net from sale credited be
deducted as bad debt.

100 Expense. — Amounts to be assessed and paid under a mutual agree-
ment between bondholders or stockholders of a corporation,, to be
used in a reorganization of a corporation, are held to be investments
of capital and not deductible for any purpose in a return of income.

101 Amounts paid from a salary received for all services rendered, are
deductible in returns of income as business expenses, when the ex-
penditures are occasioned by the service in respect of which the salary
is paid.

102 Admmistration expense.— Expenses of administration of an estate,
such as courts costs, attorney's fees, executor's commissions, etc., are

INCOME TAX. 17

chargeable against the corpus of the estate a'nd are not allowable
deductions in a return of income.

Expenditures from allowances. — The pay and allowance of Army ^qs
officers are based on the obligation of an officer to provide equipment
and mounts as a personal expense. The cost of mounts and equip-
ment is not therefore a deductible expense. .

Allowances to minor children.— The father is legally entitled to the 104
service of his minor children. As. a rule, allowances which he gives
them, whether said to be in consideration of service or otherwise,
are not allowable deductions in his return of income nor are they
income to the children.

Investment of capital. — Amounts expended for securing cojjyright i05
and plates which remain in possession of and as property of the
person making the payments, are investments of capital and can not
be allowed as deductions in returns of income.

Investment of capital. — Cost of defending title or perfecting title 106
to property, constitutes a part of the cost of the property and is not
a business expense.

Expense — Capital investments.— ^The amoimt expended for archi- 107
tect's service is part of the cost of the building and not a deductible
business expense.

Expense — Commissions paid. — Commissions paid in purchasing and 108
selling securities are a part of the cost or selling price of the securir
ties and not otherwise deductible. They do not constitute expense '
deductions in a return of income.

. Insurance premium. — Premium paid for insurance on proper-ty^09
used for business purposes is an allowable deduction. Insurance
paid on a dwelling owned and occupied by a taxpayer is a personal
expense and not deductible. Premium paid for life insurance by
the insured is not deductible.

Business insurance. — Premiums paid in advance, covering a period hq
of several years, are to be taken as a deduction on the basis of one of
two methods: When the books are kept on a cash basis, the entire
amount is deductible in the year in which the premium is paid.
Where the books are kept on an accrual basis the premium is to be
prorated over the period covered by the insurance.

Special compensation — Bonus to employees. — Special payments, some- m
times denominated gifts or bonuses, made by corporations, partner-
ships, or individuals to employees, will constitute allowable deduc-
tions from gross income in ascertaining net income for the purpose
of the income tax, when such payments are made in good faith and as
additional compensation for the services actually rendered by the
eniployees. If such payments, when added to the stipulated salaries
do not exceed a reasonable compensation for the services rendered,

33272°— IS 2

18 INCOME TAX.

they will be regarded 'as a part of the wage or hire of the employee,
and therefore an ordinary and necessary expense of operation and
maintenance, and as such will be deductible from gross income.

112 Expense — ^Eeimbursements. — Amounts paid out for expense, incident
to service rendered, and which are reimbursable, are not deductible
as expense nor are they to be returned as income when received ia
reimbursements.

113 Rent or capital investment. — ^Where a leasehold is sold for a speci-
fied sum, the purchaser may take as a deduction in his return an
aliquot part of such sum, each year, based on the number of years
the lease has to run.

114 Kent for residential property. — ^In the case of a professional man
who rents a. property for residential purposes but receives, there
clients, patients, or callers in connection with his professional work
(the place of business being elsewhere), no part of the rent ia
deductible as business expense.

115 Tenant.— 7' axes paid by a tenant to or for a landlord for business
property are additional rent and constitute a deductible item to
the tenant and taxable income to the landlord. The amount of the
tax will be deductible by the landlord.

116 Taxes.— All taxes levied by the general taxing authority, levied
and paid on all taxable subjects, including tax imposed and paid
under the act of October 3, 1917, except war-excess profits, income
taxes, and taxes assessed against local benefits, are allowable deduc-
tions to the party paying the same. Although excess-profits tax paid
is not an allowable deduction in ascertaining the net income, the net
income shown on ai^y return will be credited with the amount of
excess-profits tax for which the taxpayer will be liable for the same
year, in order to determine the amount of incoine-tax liability.

117 In the case of business, excise, license, or privilege taxes, they may
be deducted either as taxes or items of expense, but not under both
heads.

113 Tax on bank stock. — Taxes on bank stock paid under legal requirer
ment by the bank for its stockholders are deductible by the stock-
holders and not by the bank. Such payments are regarded as in the
nature of additional dividends and should be included by the stock-
holder in his dividends received.

119 Where bank stock is sold and transferred between date of assess-
ment and payment of the tax, in the absence of statute governing,
the stockholder liable for the tax (if the tax was actually paid) will
have the benefit of the tax deduction in returns of income. This is
a question of fact and to be determined as sUch.

120 loss— Definition. — The difference between " losses * * * in*
curred in his business or trade" <4th deduction) and losses "in

INCOME TAX. 19

transactions entered into for profit but not connected with his busi-
ness or trade" (5th deduction), is illustrated by the difference be-
tween the definitions of " avocation " : That which takes one from
his regular calling ; a minor occupation ; and " vocation " : The occu-
pation or pursuit to . which one devotes his time or life, a calling.
It is possible for a man to give sufficient time, attention, and capital
to the pursuit of different lines of business to constitute more than
one avenue of "business or trade or employment," his business or
trade.

Paragraph 4 of section 5 (a), act of September 8, 1916, provides 121
for losses " actually sustainpd during the year, incurred in his busi-
ness or trade, etc." These would be losses under the head of
vocation.

Paragraph 5 of section 5 (a), act of September 8, 1916, provides 12?.
for losses actually sustained during the year in transactions entered
into for profit but not connected with his business or trade; that is,
losses under the head of " avocation;" that which takes one from his
regular calling; a minor occupation. Losses under the head of
" avocation " may be deducted "to an amount not exceeding the
profits arising from transactions under this head."

Loss — Good will. — Good will does not represent a value attaching 123
to physical property. It is held to be an intangible asset whose value,
separate and apart from' the business with which it is connected, is
not capable of determination. For the purpose of income tax it is
capable of neither appreciation nor depreciation. An amount
claimed to represent its decline in value is not an allowable deduc-
tion from gross income in computing the tax liability of an indi-
vidual or corporation.

Depreciation — ^Costumes. — Costumes purchased and used exclusively 124
in the production of a play and which are not adapted for occasional
personal use and. are not so used are part of the equipment of a -busi-
ness, and as such subject to depreciation in value on account of wear
arid tear arising from their use in the business, a reasonable allow-
ance for such depreciation may be claimed in returns of income.

Depletijn — Timljer. — In the case of timberlands, the fair market 125
price or value of tiniber standing March 1, 1913, or the cost of the
timber where the purchase was made subsequent to March 1, 1913, will
be the basis for ca,lculation of depletion, and this value as of March 1,
1913, or cost when subsequently purchased, is not to be exceeded for
purposes of deduction in returns of income. The whole of such value
isto be distributed over the entire amount of standing timber on these
respective dates. See Art. 173 of these regulations for rule of cal-
culation.

20 INCPME TAX.

CREDITS.

126 Art. 9. (a) For tlie purpose of the normal tax only, the income
embraced in a personal return shall be credited with the amount
received as dividends upon the stock or from the net earnings of any
corporation, joint-stock company, or association, trustee, or insurance
company, which is taxable upon its net income.

127 (b) A like credit shall be allowed as to the amount of income, the
normal tax upon which has been paid or withheld for payment at
the source of the income under the provisions of Title I of the act
of September 8, 1916, as amended, or the act of October 3, 1917, for
the purposes of one normal tax only.

128 (c) The net income embraced in the return shall also be credited
with the amount of any excess-profits tax imposed and assessed for
the same calendar or fiscal year upon the taxpayer, and in the case
of a member of a partnership with his proportionate share of such
excess-profits tax.

NOWEESIDENT AIIENS.

129 Art. 10. The deductions provided by section 6 for a nonresident,
alien are;

130 First. Necessary expenses actually paid in carrying on any busi-
ness or trade conducted by him within the United States,' not in-
cluding personal, living, or family expense.

131 Second. The proportion of interest paid by him within the year
applicable in ascertaining his net income from all sources within
the United States, ascertained in accordance with rule prescribed
in this paragraph (except interest on indebtedness incurred for pur-
chase of obligations or securities, the interest on which is exempt
from income tax) , viz : Multiply interest paid on entire indebtedness
from all sources by quotient arising from dividing gross income from
sources within the United States by gross income from all sources
within and without the United States, but this deduction shall be
allowed only if such person shall include in his return all the in-
formation necessary for its calculation.

132 Third. Taxes. — State and Federal, but not foreign, paid within
the year (except income and excess-profits taxes paid to the United
States) and not including taxes assessed against local benefits.

133 Fourth. Losses. — ^Actually sustained during the year, incurred in
business or trade conducted by him in the TJnited States, and losses
or property in the United States from fires, storms, shipwreck,, or
other casualty, and from theft, when such losses are not compensated
by insurance or otherwise.

134 Fifth. Losses incurred in transactions entered into in the United-;
States for profit, but not connected with his business or trade in the
United States, to an amount not exceeding the profits arising from
such transactions.

rWCOMt TAX. iSl

Sixth. Debts arising in course of business or trade conducted in 135
the United States due to taxpayer actually ascertained to be worth-
less and charged off within the year.

Seventh. Depreciation in an amount repressntir.g exh:mstion from 136
wear and tear of property within the United States arising out of
its use or employment in business or trade, but no deduction shall
be allowed for any amount paid out for new buildings, permanent
improvements or betterments to increase the value of any property
or estate, and no deduction shall be made for any amount of expense.
of restoring property or making good the exhaustion thereof for
which an allowance is or has been made. The value to be cared for
by depreciation is the actual amount invested in the property, and
not the value which may be arbitrarily or otherwise fixed.

Eighth, (a) Depletion. — An amount representing the capital in- 137
vested in product removed during the year through oil or gas, wells
or mines within the United States. (&) Depletion can be claimed
only by the owner in fee of the mineral interest. Mineral in place
being real estate, in all cases where aliens are not permitted to own
real estate in the United States without some enabling act making
such ownership possible, except upon a showing of title satisfactory
to the Commissioner of Internal Eevenue, no depletion shall be
allowed to a nonresident alien. Upon a satisfactory showing of fee
title in a nonresident alien to mineral interest being operated by
means of wells or mines, depletion shall be calculated in the same
manner as provided in Articles 170, J.71, and 172.

Art. 11. {a) For the purpose of the normal tax only, the income 138
embraced in a personal return of a nonresident alien individual shall
be credited with the amount received as dividends upon the stock or
from the net earnings of any corporation, joint-stock company or
association, trustee, or insurance company, which is taxable upon its '
net income. *

(&) A like credit shall be allowed as to the amount of income, the 139
normal tax upon which has been paid or withheld for payment at the
source of the income under the provisions of Title I of the act of
September 8, 1916, as amended, or the act of October 3, 1917. -

[g) The net income embraced in the return s-liall also be credited 140
with the amount of any excess-profits tax imposed and assessed for
the same calendar or fiscal year upon the taxpayer, and in the case
of a member of a partnership, with his proportionate share of such
excess-profits tax.

Art. 12. A nonresident alien may have the benefit of the deduc- 141
tions and credits above, provided only by filing or causing. to be filed
with the collector of internal revenue a true and accurate return of
his total income received from all sources, corporate or otherwise, in
the United States. In case of failure to file return the tax is to be
collected on the gross income from all sources in the United States.

22 INCOME TAX.

142 Art. 13. When all income tax to which income of a nonresident
alien is subject is not withheld at the source, a return of income
will be required to be filed by or on behalf of said nonresident alien,
and penalty for failure to make return in time will attach. All
property in the United States of a nonresident alien will be subject
to distraint for collection of tax and penalty.

EXEMPTIONS.

143 Art. 14. TTie exemptions helow are given in respect of the normal
income tax only. — They are limited to individuals who are citizens
or resident aliens and are provided by (a) section 7, act of September
8, 1916, as amended by the act of October 3, 1917, and by (6) sec-
tion 3, act of October 3, 1917.

14'1 (a) Under the act of 1916 (sec. 7), for the purpose of the
normal income tax, there shall be allowed as an ex-
emption in the nature of a deduction from the amount
of net income of each citizen or resident of the United
States -• : — $3, 000

145 (J) An additional $1,000 is allowed when the person making

the return is head of a family or is married and living
with husband or wife (as the case may be), in that

case making 4,000

(Provided, that only one deduction of $4,000 shall
be made from the aggregate income of both husband
and wife when living together.)

146 (<;) When the person making the return is the head of a

family and there are children of the family under 18
years of age, dependent upon such person, or if 18 years
of age or over but incapable of self -support because
mentally or physically defective and dependent by rea-
son of that fact, there is an additional exemption for
each child (to be claimed by person making return
and supporting child) 200

147 (t?) Estates in process of administration, or in trust, the in-

come of which is not distributed annually or regularly

(to be claimed by executor, administrator, or trustee) 3, 000

SECTION 3, ACT OP OCTOBER 3, 1917.'

148 Section 3^ act of October 3, 1917, provides that in case of normal
tax imposed by section 1 of that act :

149 The exemption of $3,000 and $4,000 provided by section 7, act of
September 8, 1916, as amended by the act of 1917, shall be, respec-
tively, $1,000 and $2,000. *

INCOME TAX. 23

In all cases where under section 7, act of September 8, 1916, as 150
•mended, exemptions of $3,000 or $4,000 are given in the nature of
a deduction for the purpose of the normal income tax, for the pur-
pose of normal tax under the act of October 3, 1917, said exemptions
of $3,000 and $4,000 are to be, respectively, $1,000 and $2,000.

Fiduciaries acting for minors or incompetent persons are permitted 151
to take the personal exemption as to income derived from property of
■which they have charge in favor of .each ward or beneficiary.

ETIMNGS UNDER ARTICLE 14 AS TO EXEMPTIONS.

DEATH WITHIN THE CAIENDAB, YEAR.

Where a person having a taxable income dies within the calendar 152
year his personal representative in making return for him will be
eiititled to claim the full exemption granted by the statutes for the
calendar year.

HEAD OE A EAKILY.

A head of a family is a person who actually supports aiid .main- 153
tains one or more individuals who are closely connected with him
by blood relationship, relationship by marriage, or by adoption, and
whose right to exercise family control and provide for these de-
pendent individuals is based upon some moral or legal obligation.

EXCESS.

Personal exemptions from tax are granted in respect of the normal 154
income tax only. Where the total of allowable exemptions and cred-
its exceeds the amount of net income, the excess of such exemptions
may not be availed of as against the additional tax.

DEPENDENT CHILDREN.

The exemption of $200 for each dependent child provided by 155
section 7, act of September 8, 1916, as amended, is given in respect
of the income tax and is, therefore applicable under both the act of
l^eptember 8, 1916, as amended, and the act of October 3, 1917, under
the same conditions of fact.

HirSBAND OR WIFE DYING DURING CALENDAR YEAR.

Where a husband or wife having a taxable income dies within a 166
calendar year, and the full exemption for the calendar year is used
J)y the personal representative in making return for the deceased,
if the survivor is also required to make a return at the close of the

24 INCOME TAX.

calendar year for income received within that calendar year the full
personal exemption, according to the marital status of the survivor
at the close of the calendar year, may be claimed in a return of
incopie.

157 Art. 15. Section 1 (a), act of September 8, 1916, levies a normal
income tax of 2 per cent on the entire net income received in the
preceding calendar year from all sources by every individual, a citi-
zen or resident of the United States ; and a like tax upon the entire
net income received in the preceding calendar year from all sources
■within the United States by every individual, a nonresident alien.

158 Art. 16. Section 1 (i), act of September 8, 1916, levies upon the
total net income from all sources of every individual, a citizen or
resident of the United States, or, in the case of a nonresident alien
the total net income received from all sources within the United
States, an additional income tax, at the rates therein specified, upon
the amount by which such total net income exceeds $20,000.

159 Art. 17. Section 1 of the act of October 3, 1917, levies (in addition
to the normal tax vmder the act of 1916), a normal income tax of 2
per cent upon the net income of every individual, a citizen or resi-
dent of the United States, received in the calendar year 1917 and
every calendar year thereafter. The normal income tax under this
section is not levied on the income of nonresident aliens.

160 Art. 18. Section 2, act of October 3, 1917, levies (in addition to
the additional tax imposed l>y section 1 (&), act of 1916) an addi-
tional tax upon the total net income in excess of $5,000 of every in-
dividual (citizen, resident, or nonresident alien) at the rates therein
prescribed, received in the calendar year 1917 and every calendar
year thereafter.

161 Art. 19. Additional tax includes undistributed profits.

For the purppse of the additional tax, the taxable income of any
individual shall include the share to which he would be entitled of
the gains and profits, if divided or distributed, whether divided or
distributed or not, of all corporations, joint-stock companies or as-
sociations, or insurance companies, however created or organized,
formed or fraudulently availed of for the purpose of preventing the
imposition of such tax through the medium of permitting such gains'
and profits to accumulate instead of being divided, or distributed;
and the fact that any such corporation, joint-stock company or as-
sociation, or insurance company, is a mere holding company, or that
the gains and profits are permitted to accumulate beyond the reason-
able needs of the business, shall be prima facie evidence of a fraudu-
lent purpose to escape such tax; but the fact that the gains and
profits are in any case permitted to accumulate and become surplus
shall not be construed as evidence of a purpose to escape the said
tax in such case unless the Secretary of the Treasury shall certify'

INCOME TAX.

25

that in his opinion such accumulation is unreasonable for the pur-
pose of the business. When requested by the Commissioner of In-
ternal Revenue, or any district collector of internal revenae, such
corporation, joint-stock company or association, or insurance com-
pany shall forward to him a correct statement of such gains and
profits and the names and addresses of the individuals or sharehold-
ers who would be entitled to the same if divided or distributed.

Art. 20. Graduated additional tax rates and amounts of income subject 163
thereto —

Amount subject to tax.

Actot

Sept. 8,

1916.

Actot
Oct. 3,
1917.

Total.

$5,000 to $7,500

$7,500 to $10,000........

$10,000 to $12,500

$12,500 to $15,000

$15,000 to $20,000

$20,000 to $40,000

$40,000 to $60,000

$60,000 to $80,000

$80,000 to $100,000

$100,000 to $150,000

^$150,000 to $200,000

$200,000 to $250,000

$250,000 to $300,000. . . . .

$300,000 to $500,000

$500,000 to $750,000

$750,000 to $1,000,000. . .
$1,000,000 to $1,500,000.
$1,500,000 to $2,000,000.
On excess of $2,000,000.,

Pa cent.

1.

2

3

4

5

6

7

8

9
10
10
11
12
13

Per cent.
1

2

3

4

5

7
10
14
18
22
25
30
34
37
40
45
50
50
50

Per cent.
1

2

a

4

5
8
12
17
22
27
31
37
42
46
50
55
61
62
63

THE RETURN.

Art. 21. The return must be filed after the close of the calendar 163

year and on w hefore March 1, hnnudUy.
. * * * * * * * jg4

Art. 22. The Commissioner of Internal Kevenue may, in his dis- 165
cretion, upon application therefor and upon satisfactory showing,
grant a reasonable extension of time, in meritorious cases, for filing
returns of income "by persons residing or traveling abroad who are
required to make and file retui-ns of income and who are unable to file

2b INCOME TAX.

said returns on or before March 1 of each year. The return may be
made by an agent when by reason of illness, absence, or nonresidence
the person liable for said return is unable to make and render the
same, the agent assuming the responsibility of making the return and
incurring penalties provided, for erroneous, false, or fraudulent re-
turn. In ordinary cases of citizens and residents, where failure to
file returns is due to sickness or absence, the Collector of Internal
Revenue may in his discretion and on application therefor before
expiration of 30 days from the time return should have been filed,
allow such further time as he may deem proper (not exceeding 30
days from the date return should have been filed), for. making and
filing return. The collectors' authority in such cases is limited to
30 days. Further extension can be made by the Commissioner of
Internal Revenue only and is confined to meritorious cases and upon
satisfactory showing why return was not or can not be made and
filed within the extension granted by the collector.

166 Art. 23. Forms of returns are provided by the Commissioner of
Internal Revenue, and are to be had from the collectors of internal
revenue of the several collection districts.

16 Art. 24. An individual keeping accounts upon any basis other than
that of actual receipts and disbursements, unless such other basis
does not clearly reflect his income may, subject to regulations made
by the Commissioner of Internal Revenue with the approval of the
Secretary of the Treasiiry, make his return upon the basis on which
his accounts ai-v. kept.

168 Art. 25. The ammal returns will be forwarded by collectors by
registered mail or express to the Commissioner of Internal Revenue
with the list for the month in which the returns are filed.. Collectors
must provide that said returns and all forms relating thereto ai'e
securely sealed in envelopes or packages before forwarding the

169 same-

Art. 26. In the case of citizens and resident aliens —

Returns are required of all unmarried persons of lawful age

having a net income of $1,000 or over. j

And of all married persons having a n'et income of $2,000 or

over.
Heads of families who are married will be required to make

returns of income when having a net income of $2,000 or

over.
Heads of families who are unmarried will be required to make

returns of income when having a net income of $1,000 or

over, though the basic exemption which may be claimed in

a return of income will be $2,000.

170 Under the act of September 8, 1916, as amended, and the act of
October 3, 1917, returns will be required in the case of net incomes^

INCOME TAX. 27

equal to or in excess of $1,000 or $2,000, according to the marital
status of the person making the return. In the returns so required
the basic personal exemptions will be $1,000 under the act of Oc-
tober 3, 1917, and $3,000 under the act of September 8, 1916, as
amended. The exemption allowed husband and wife living together
may be taken by one or divided between them in such ratio as they
may determine.

RULINGS ON MAKING RETURNS.

Receipt and payment basis. — Returns should be made on the basis 171
of receipt unless the individual liable for the return keepa accounts
on some other basis which will clearly reflect his income.

Where filed. — Eeturns of income of individuals are to be filed with 172
the collector of internal revenue for the district in which such per-
son has his legal residence or principal place of business, or if there
be no legal residence or place of business in the United States, then
with the collector of internal revenue at Baltimore, Md. The returns
shall be in such form as shall be prescribed by the Commissioner of
Internal Revenue with the approval of the Secretary of the Treasury.

On basis of calendar year. — Returns of individuals can not be 173
accepted prior to the close of the calendar year. The exception, in
cases of closed administration, is a matter of convenience to those
concerned and is granted by reason of the fact that the period to be
covered by the return has completely elapsed.

Place of filing. — Persons in the military or naval service of the 174
United States may file their returns of income with the collector of
intei;nal revenue of the district in which they have a legal residence,
or with the collector of internal revenue at Baltimore, Md.

Verification of. — ^AU income-tax returns must be verified T*nder oath 175
or affirmation. Persons in fhe naval or military service of the United
States may verify their returns before any official of those services
authorized to administer oaths for the purposes of those services.

Income-tax returns executed abroad may be attested free of charge uq
before United States consular officers.

Where a foreign notary or other official having no seal shall act 177
as attesting officer, the authority of such attesting officer should be
certified to by some judicial official or other proj)er officer having
knowledge of the appointment and official character of the attesting
officer.

Income from exempt securities. — ^Where the entire income of an indi- 178
vidual is from tax-exempt bonds and where the amount of income
other than that from tax-exempt securities is less than the ajnount of
income for which a return is required, no return of income is to be
made^ Interest from securities which is exempt from tax under, sec-

28 INCOME TAX.

tion 4 of the Income Tax Law is not to be included in returns of
income.

179 Administrator or executor. — Administrators or executors may, im-'
mediately after their discharge, upon final accounting, file with the
proper collector of internal revenue a return of income for the in-
come of the estate for the calendar year in which the administration
was closed, and should pay the tax found by such return to be due
immediately upon receipt of notice and demand for the amount of
such tax. There should be attached to this return a copy of the
certificate, under seal, setting forth the fact of final accounting and
discharge of the executor or administrator. The liability for return
is fixed by the law as of December 31, and return will be required
in accordance with the provisions of law existing on that date.

180 An ancillary administrator is held to be merely an agent of the
domiciliary administrator and shov\ld transmit to him all information
as to income of the estate received by the ancillary administrator, to
the end that the original administrator may make a return covering
the entire income of the estate.

181 Keceivers who, as officers of a court, stand in the stead sf some
principal are required to account for income tax as the principal
would have been required to account.

182 Husband and wife filing separate. — ^Where husband and wife file
separate returns of income, one of them being filed in time and the
other delinquent, such returns are not supplemental of each othei
and delinquency must be answered for by the one in connection with
whose return it occurred.

183 Wife's income. — ^Unless the wife has a separate estate which re-
quires her to file a separate return of income, or to join with her
husband in a return which shall set forth her income separately;.;
her husband should include in his return the income accruing to
the wife from services rendered by her, or the sale of product of
her labor. The actual . proceeds coming into the wife's, possessioii-
during the tax year constitute the income to be included, and not
the amount estimated upon acceptance prior to payment for articles
sold.

184 Inspection of. — An executor acts for his principal and not for the
beneficiaries of the estate of his principal. Beneficiaries are not
entitled, as such, to an inspection of returns of income filed by such
executor,

FIDUCIAEIES.

185 Art. 27. Fiduciaries acting for minors or other incompetents will
be required to make returns of income according to the marital status
of the beneficiaries, and in all cases of return under section 2 (b),
act of September 8, 1916, as amended, when the income of the estate

INCOME. TAX, 29

or trust, as an entity, is $1,000 or over. This return will be on Form
1040 or 1040A.

Fiduciaries are required to make returns of income on Income Tax 186
Form 1041 whenever the interest of any beneficiary in the net income
of an estate or trust for which the fiduciary acts is $1,000 or over
for an unmarried beneficiary, and in case there are married bene-
ficiaries, then a return will be required whenever the interest of any
Buch married beneficiary is $2,000 or over.

Art. 28. Where the beneficiaiy is a nonresident alien individual 187
the tax imposed by the act of September 8, 1916, as amended, and
the act of October 3, 1917, is to be accounted for by such fiduciary on
a return of income for such nonresident alien beneficiary on Income
Tax Form 1040 or 1040A, as the case may be.

Art. 29. Fiduciaries will be subject to all the provisions of law 188
which apply to individuals who are required to make returns of
income. A fiduciary making return shall make oath that he has
sufficient knowledge of the affairs of the person, trust, or estate for
whom or which he acts to enable him to make such return, and that
the same is, to the best of his knowledge and belief, true and correct.
A return b5r>Jon-e of two or more joint fiduciaries in the form pre-
scribed filed in the district in which such fiduciary resides shall be a
sufficient compliance with the requirement for fiduciary return.

" Fiduciary " is a term which applies to all persons or corporations 189
that occupy positions of peculiar confidence toward others, such a,s
trustees,_executors, or administrators; and the fiduciary for income-
tax purposes is any person or corporation that holds in trust an
estate of another person or persons.

There may be a fiduciary relationship between an agent and a 190
principal, but the word "agent" does not denote a "fiduciary"
within the meaning of the income-tax law.

Power of attorney. — ^A fiduciary relationship for the purposes of 191
the income tax can not be created by a power of attorney. An agent
having entire charge of property with authority to effect and execute
leases with tenants entirely on his own responsibility and without
consulting his principal, paying taxes and expenses and all other
charges in connection with the i^roperty out of funds in his hands
from collection of rents, merely turning over the net profits from the
property periodically to his principal by' virtue of authority con-
ferred upon him by a power of attorney, is not a fi^duciary within
the meaning of the incomcrtax law. In all cases where no legal
trust has been created in the estate controlled by the agent and
attorney the liability under the law rests with the principal.

Trust 'estates as entities. — ^Where income under the provisions of 192
section 2(.&), act of September 8, 1916, is accounted for in a jceturn
of income by the executor, administrator, or trustee, as the case may -

30 INCOME TAX.

be, and the tax shall have been assessed and paiid under such return,
such income is thereby freed of all tax liability and may be there-
after dealt with without further regard to the provisions of the
income-tax law. '

193 Under the provisions of section 2(&) it is held that estate^ during,
the period of administration have but one beneficiary, and that
beneficiary is the estate. Therefore a return on Form 1040 or 1040A,
subject to all the deductions and exemption, shall be made by the
executor or administrator for such beneficiary and the entire tax
paid thereon.

194 Deed of trust.— A deed of trust must be absolute so far as the
conveyance of title is concerned and irrevocable by the donor, other-
wise the income from the property in question will accrue to the
donor and must be accounted for by him.

,Qc Executors and administrators. — Where, during the period of admin-
istration, an executor converts the estate in his possession as such
executor into money for the purpose of settling the estate and closing
the administration and in which conversion a profit is realized which
with other income exceeds $1,000 a return of income should be made
by the executor covering the period of adminisftat^ioji in Avhich
should be included all gains, profits, and income of the estate during
such period, and he should pay the tax found by such return to be
due. The income of the estate being thus freed of income-tax lia-
bility may thereafter be dealt with without further regard to income-
tax requirements. {

190 Proceeds of life insurance policies payable to the estate of a
decedent, when received by an executor or administrator, are, in the
amount by which such proceeds exceed the premium or premiums
paid by the decedent, income- of the estate to be accounted for by
the executor or administrator under the provisions of section 2 (6),
act of September 8, 1916. This return is to be made on income-tax
Form 1040 or 1040A.

197 Administrator or executor. — Liability for payment of income tax
attaches to the person of an executor or administrator for income
tax up to and including the date of his discharge, regardless of the
fact that the time in which claim is made and filed against the estate-j
has expired or where, prior to distribution and discharge, the executor
or administrator had notice of his obligations to the Federal Gov-'
ermnent or where he failed to exercise due diligence in determining
whether or. not such obligations existed. ;/

198 Liability for the tax due from a deceased person, or from his estatej.
also attaches to the estate itself, and when by reason of distribution of
the estate and discharge of the executor or administrator it shall
appear that collection of the tax can not be made from the execiitor

INCOME TAX. 31

sr administrator, the collector will make demand on the distributees
for their proportionate share of the tax due and unpaid.

Depreciation deduction in return of. — ^In the case of a trust estate 199
where the terms of the will or trust or the decree ol a court of com-
petent jurisdiction provides for keeping the corpus of the estate
intact, and where physical property forming a part of the corpus
oi such estate has suffered depreciation through its employment
in business, a deduction from gross income for the purpose of caring
for this depreciation, where the deduction is applied or held by the
Sduciary for making good such depreciation, may be claimed by the
fiduciary in his return of income. Fiduciaries should set forth in
connection with their returns the provision of- law, trust, or decree
requiring such depreciation deduction where any exists or whea
actual depreciation occurs, the amount thereof, and that the same
h.as been or will be preserved and applied as such. • Ail amounts paid
by fiduciaries to beneficiaries of trust estates from the income of
such trust estates, whether from reserves or otherwise, are held to be
distributions of income and will be treated for income-tax purposes
in accordance with the provisions of law and regulations applicable
to income of such beneficiaries.

Nonresident alien beneficiary. — Where a fiduciary in the United 200
States is the recipient of trust income for which there is but one
beneficiary and that beneficiary a nonresident alien, the fiduciary will
be required to make full and complete return on Income Tax Form
1040 or 1040A, as the case may be, for this trust income on behalf of
the nonresident alien and pay any and all tax found by such return
to be due. Where there are two or more beneficiaries, one or all of
whom, are nonresident aliens, the fiduciary shall render a return on
Form 1041, and a personal return on Form 1040 or 1040 A for each
aonresident alien beneficiary.

Parent — Minor child.— The parent is held to be the natural guardian 201
jf a minor child. Income received by the minor child from sources
sther than the parent should be included by the parent in his return
)f income. The fact that such income is not appropriated by the
parent is immaterial, as it will be held, in the absence of a showing
)f fact to the contrary, that such income was subject to appropria-
tion and was appropriated by the parent, and that the child receives
;he same as a gift from the parent. Where the income is from a
separate estate and the parent has been appointed guardian and the
3onditioils are such that the income so received is to be held for the
ise of the child, it shall not be included in the return of income of
;he -parent, -but shall be accounted for otherwise for the purposes of
;he income tax in mariner and form as called for by the facts of the
larticular case.

32 INCOME TAX.

202 Trust, return of.— Where, in the case of more than one trust, the
creator of the trust in each instance is the same person and the trus-
tee in each instance is the same, the trustee should make a single re-
turn on Form No. 1041 for all of the trusts in his hands, notwith-
standing the fact that they arise from different instruments. When
a trustee holds trusts created by different persons for the behejSt of
the same beneficiary, he should make return for each trust separately
on Form No. 1041. This ruling is based on the identity of the creator
and the identity of the trustee of the various trusts, and not upon the
identity of the beneficiary.

203 Incompetents. — A committee of the property of an incompetent
person is held to be a fiduciary for the purpose of income tax and
required to make a return on Form 1040, revised, for the incompe-
tent whenever the amount of income is sufficient to require a return.

204 Two estates. — A fiduciary acting for a beneficiary in more than one
estate or trust is required to account for each estate separately when
the amounts are such as to require the filing of a return, and also a
return of information.

205 A fiduciary acting for a minor or insane person having a net in-
come of $1,000 or $2,000, according tc, the marital status of such per-
son, will be required to file a return for such incompetent on Form
1040 and 1040A and pay the tax found by such return to be due, in
addition to the requirement in the preceding paragraph when there
is more than one beneficiary of the income of the same trust.

206 Stock dividends paid from earnings or profits accumulated after i
March 1, 1913, received by a fiduciary and retained as an accre-|
tion to the estate under the ter'nui of the will or trust are held to be I
income to the estate and taxable as such to the estate. ,

*"' Income accumulated in trust for unascertained jjersons or persons
with contingent inter^ts is held to be income accruing to the estata
and is taxable to the estate.

208 Income held for future distribution under the terms of the will or
trust shall be likewise taxed except when returned by the beneficiary !
for the purpose of the tax.

209 AH fiduciaries are indemnified against the claims or demands of
every beneficiary for all payments of taxes which they shall be re- j
quired to make under the provisions of this title and they shall have
credit for such payments in any accounting which theiy make as such |
fiduciaries. ■

210 The beneficiary will be required in the case of trust estates to ac-
count for the actual amounts distributed or credited to him.

211 Art. 30. Partnerships. — ^Partnerships as such are required to make re-
turn of income for income-tax purposes only when requested so
to do by the commissioner or collector, and when so requested they
shall tender a correct return of the earnings, profits, and income

INCOME TAX. 33

of the partnership, except income exempt from tax under section
4 of the income-tax law, setting forth the item of gross income
and the deductions and credits allowed by law as for an indi-
vidual, citizen, or resident alien, and the names and addresses of the
individuals who would be entitled to the net earnings, profits, and
income, if distributed. In computing its profits, for the purpose of
the income tax and return as aforesaid, a partnership shall not de-
duct premiums on life-insurance policies covering the lives of mem-
bers of the partnership, its^ employees, or those financially interested
in the business or trade conducted by the partnership or -otherwiso.
Individuals entitled to share in partnership net income are required
to include in their returns of income their respective shares of such
partnership net income, v/hether distributed or not. In reporting
their share of partnership net income the partners will exclude such
part thereof as may have been received by the partnership from
sources exempt from tax under provisions of section 4, act of Septem-
ber 8, 1916, as amended, and which shall have been included by the
partnership in its statement of net income distributed to the partners.
The partners shall include in their returns of income their propor-
tionate share of partnership net income derived from dividends, but
• the amount of such dividends so received shall be allowed as a credit
for the purpose of computing the normal incom.e tax. Partnerships
"having a net income of $6,000 or over will be required to render
returns for the purpose of excess-profits tax.

Insurance premiums. — Insurance premiums paid on life-insurance 213
policies covering the lives of officers, employees, or those financially
iiiterested in any business conducted as a partnership or by an indi-
vidual shall not be deducted in computing the net income of such
individual or in computing the profits of such partnership for the
purposes of paragraph (e) of section 8 of the act of September 8,
1916, as amended.

Identity of income. — The character of partnership profits divisible 213
between persons has no reference (except as otherwise specially pro-
vided for in sec. 8 (e), act of Sept. 8, 1916, as amended) to any
character which, as income accruing to the partnership it may have
borne prior to the receipt by the partnership, and hence, with the
exception noted, incom.e received from a partnership can not be
traced to its source behind the partnership for the purpose of claim-
ing individual exemption. Where the result of partnership opera-
tion is a net loss, the loss will be" divisible between the partners in
the same proportion as net income would have been divisible, and
may be used by the individual partners in their returns of income

Art. 31. A partnership shall have the privilege of fiy'mg and mak-214
ing return on the basis of a fiscal year the same as pro ?ided for cor-

33272°— 18 3

34 INCOME TAX.

porations by section 13 (a) and (v>), act of September 8, 1916, as
amended. If the fiscal year of a partnership (other than the calendar
year) ends in a calendar year for which there is a rate of tax, differ-
ent from the rate for the preceding calendar year, for the purpose
of the income tax, each partner's share of partnership profits shall
be divided in the proportion of the different calendar years compos-
ing said fiscal year and the rate of tax for the respective calendar
years shall apply to that pai-t of such profits as thug falls within said
calendar years.

215 Any partnership may at its option designate the last day of any
month as the close of its fiscal year. In each case where the partner-
ship's fiscal year differs from the calendar year it shall, not less than
30 days prior to March 1, give notice in writing to the collector of
internal revenue of the district in which its principal place of busi-
ness is located that the day it has thus desjignated is the closing day
of its fiscal year.

216 Art. 32. Nonresident alien individuals. — A nonresident alien indi-
vidual shall make a full and accurate return of all net income re-
ceived from sources within the United States, regardless of amount,
imless the tax oil such income has been fully paid at the source ; and
is not entitled to the benefit of the several deductions and credits
provided by section 6 of the act of September 8, 1916, as amended
by the act of October 3, 1917, unless such return is filed by him or his
authorized agent.

217 Return of income. — Nonresident aliens are not entitled to any spe-
cific exemption as a deduction from net income from sources within
the United States. The responsible heads or representatives of non-
resident aliens in connection with any sources which said nonresident
aliens may have within the United States, shall make a full and com-
plete return of such income and shall pay any and all tax, normal
and additional, assessed upon the income received by them in behalf
of tiieir nonresident alien principals, in all cases where the income
tax on income so in their receipt, custody, or control shall not have
been withheld at the source.

218 Where nonresident aliens have various sources of income within
the United States so that at any one source or from all sources com-
bined, the amount of income shall call for the assessment of addi-
tional tax and a return of income shall not be filed by or on behalf
of a nonresident alien for the purpose of the assessment of income
tax, the Commissioner of Iiiternal Revenue will cause a return of
income to be made and include therein the income of the nonresident
alien from all sources concerning which he has information and
shall assess the tax and collect the same from one. or more or all of
the sources of income within the United States of said nonresident
alien, without allowance for deductions and credits under section 6..

INCOME TAX. 35

Payment of tax on.— Income derived by nonresident aliens from 219
sources in the United States is subject to the normal or additional
tax, or both, as the case may be, and said tax shall be paid by the
owner of said income, or the proper representative of the nonresident
alien having the receipt, custody, control, or disposal of the same. In
all cases the proper representative in the United States of a nonresi-
dent alien, with respect to such income, shall make return for such
nonresident of all such income coming into his custody or control
and pay the tax thereon as provided by law; provided, however,
where all income shall have been paid over by the representative to
his principal on or before October 3, 1917, under the law and income
tax regulations in force up to thai date, or where the stockholder of
record shall not — between October 3 and December 31, 1917 — ^be in
receipt of or have in his custody or control income the property of
his said prir^ipal, such representative will be relieved from paying • ■
said tax, leaving the same a charge against the nonresident alien and
to be collected from him by any means at the disposal of the Com-
missioner of Internal Revenue; but where such representative shall
have in his possession, custody, or control subsequent to October 3, '
1917, income of such nonresident alien, said representative shall pay
the total tax due upon the income of such nonresident alien so in his
custody and control for the entire year 1917 and subsequent years.

Exempt income. — Nonresident aliens will not be required to make 220
return of any. of the classes of income specified by section 4, act of
September 8, 1916, as amended, and received by them from sources in
the United States. (See art. 5.)

EXJLIITGS UNDER ARTICLE 32.

Salary, rents, etc. — It is held that salaries, wages, commissions, and 221
rents paid by domestic corporations, resident individuals, or partner-
' ships to nonresident alien employees for services rendered entirely in
a foreign country and for property located in a foreign country are
not subject to deduction and withholding of the normal tax and such
payments of income -will not be subject to the income tax in the hands
of the recipient as from a source within the United States.

Refund, on return.— Where, upon filing return of income, it ap-
pears that a nonresident alien is not liable for income tax, but, never-
theless, income tax shall have been withheld at the source, in order
to obtain a refund on the basis of the showing made by the return
there shall be attached to the return a statement showing accurately
the amounts of tax withheld, with the names and post-office addresses
of all withholding agents.

Return by agent. — The agent of a nonresident alien is responsible 223
. for a correct return of all income accruing to his principal within the

36 - INCOME TAX.

purview of the agency, and the agent will be held responsible for a
complete return of ail such income. The agency appointment will
determine how completely the agent is substituted for the principal,
for income-tax purposes.

224 Foreign corporations — Dividends on stock. — ^Dividends on stock of
domestic corporations or resident alien corporations are held, prima,
facie, to be income of the record owner of the stock, and such record
owner will be liable for the income tax, normal or additional, accord-
ing to his or its individual or corporate status unless a disclosure
of actual ownership is made to the Commissioner of Internal Rev-
enue which shall show who the owner is and his address, and that
the record owner is not the actual owner.

225 When the record owner of such stock is a nonresident alien cor-
poration, etc., not having an office or place of business in the United

"States, the debtor corporation will withhold the normal income
tax and pay the same to the proper officer of the United States au-
thorized to receive it in manner and form provided for withholding
and accounting for tax withheld.

226 In all cases where the actual owner is a nonresident alien individual
or corporation, and the record owner is an individual, firm, or cor-
poration in the United States (a citizen or resident alien), and the
aforesaid showing of actual ownership is made, the record owner
will be held, for income-tax purposes, to have the receipt, custody,
control, and disposal of the dividend income and will be required
to make return for the actual owner and pay the tax found by such
return to be due. Where the actual owner is a nonresident alien
corporation, return will be made regardless of the amount of divi-
dend and the normal income tax will be paid, and when the actual
owner is a nonresident alien individual, a return shall be made re-
gardless of the amount of the income, and when the net amount of
sucli income exceeds $5,000 said custodian shall also pay the addi-
tional tax on such income. When it shall appear from the dis-
closure herein provided for' that the actual owner is a nonresident
alien partnership, all certificates making such disclosure shall be
transferred to the Commissioner of Internal Revenue for the in-
formation of the collector of internal revenue, but no return will
be made for such partnership and no amount will be retained from
such income by the representative of such partnership in the United
States unless and until such representative shall be so instructed by
the Commissioner of Internal Revenue. When a nonresident alien
record owner of stock of domestic or resident corporations is an
organization subject to withholding at the source of dividend pay-
ments, but is not tJie actual owner of the stock, such record owner
may make disclosure, in form prescribed by the Commissioner of

IJSUOMK TAX. 37

Internal Revemie, of actual ownership, in which case said domestic
or resident corporations will be governed by the established facts.

If the record owner does not exercise his right to disclose actual 227
ownership for the purpose of claiming exemption from having tax
withheld at the source, debtor corporations and their withholding
agents in the United States will be held liable on their stock records
of ownership f9r the tax required to be witliheld by section 13 (/) of
the act of September 8,' 1916.

In the absence of disclosure of actual ownership filed with debtor 228
corporations or their withholding agents, in manner and form pro-
vided for, the normal tax required to be withheld in accordance with
stock records of ownership can only be released to a record owner not
liable f oi- tax upon a proper showing to the Commissioner of Internal
Eevenue of record and actual ownersliip, the names and post-office
ad^iresses of debtor corporations and withholding agents, and the
amounts withheld.

The record owner is held to be " the proper representative having 229
the receipt, custody, control, or disposal " of income of the actual
owner and is required to file a return for or on behalf of the actual
owner for the purpose of assessment of income tax not withlield at
the source.

When a return is not required to be filed by or on behalf of the 230
actual owner, the showing may be made upon the certification of the
record owner.

Upon the shoAving thus made, either by certification or return, as 231
the circumstances may require, the Commissioner of Internal Eev-
enue will make such assessments and issue such instructions to
debtors and withholding agents as will insure the proper collection
of tax in accordance with the respective tax liabilities.

INFORMATION AT THE SOURCE.

Art. 33. Every person, corporation, partnership, or association 232
doing business as a broker on any exchange or board of trade or
other similar place of business, shall, upon request of the Commis-
sioner of Internal Eevenue, render a correct return under oath, on a
form furnished by the Commissioner of Internal Eevenue for that
purpose, showing the names of customers for whom such person,
corporation, partnership, or association has transacted any business,
with such details as to. the profits, losses, or other information as
may be called for by such return form as to each of puch customers. •
See special regulations No. 40.

' Art. 34. Every person, corporation, partnership, association, and 233
•insurance company, in whateiver capacity acting, including lessees or
'mortgagors of real or joersonal property, trustees actuig in any trust

38 INCOME TAX.

capacity, executors, administrators, receivers, conservators, and em-
ployers, making payment to another person, corporation, partner-
ship, association, or insurance company of interest, rent, salaries,
"wages, premiums, annuities, compensation, remuneration, emolu-
ments, or other fixed or determinable gains, profits, and income
(other than payments coming within the paragraph next above and
dividend payments under sec. 26) of $800 or more, in any taxable
year, or, in the case of such payments made by the United States,
the officers or employees of the United States having information as
to such payments, are hereby authorized and required to render a
true and accurate return to the Commissioner of Internal Revenue,
on the form prescribed for that purpose (Form 1099), setting forth
the amount of suCh gains, profits, and income and the name and
address of the recipients of such income.

234 Letter of transmittal. — Eeturns of information for the preceding
calendar year shall be filed with the Commissioner of Internal Reve-
nue on or before March 1 of each year, accompanied by a letter of
transmittal, under oath (Form 1096), which will show the number of
returns filed and the aggregate amoimt represented by the payments.

235 Salary and commission. — ^Vhere a person receives a cash compensa-
tion for services rendered and in addition thereto living quarters,
the value to such person of the quarters furnished constitutes income
subject to tax. A return under section 28 is required in each case
where the cash compensation received plus the value of living quar-
ters furnished equals or exceeds $800 for a tax year.

236 Art. 35. Such returns of information shall be required, regardless
of amount, in the case of payments of interest upon bonds, mort-
gagefi, or deeds of trust or other similar obligations of corporations,
joint-stock companies, associations, and insurance companies; and
in the case of collection of items (not payable in the United States)
of interest ujDon the bonds of foreign countries and interest on the
bonds and dividends on the stocli of foreign corporations by per-
sons, corporations, partnerships, or associations undertaking as a
matter of business or for profi-t the collection of foreign payments of
such interest or dividends by means of coupons, checks, or bills of
exchange.

237 In the case of items (payable in the United States) of interest upon
bonds of foreign countries and interest upon bonds and dividends
from stocks of foreign corporations the fiscal agent in the United
States v,ill be the source for purposes of information. If no owner-
ship certificate is received with the item, the first bank or collection
agent receiving the same shall execute a certificate, Form 1001, show-
ing the name and address of the owner, if known, or the person
presenting the item, which certificate shall be forwarded to the fiscal

INCOME TAX. 39

agent in the same manner as if the certificate had been signed by the
owner.

In the case of such foreign items (not payable in the United 238
States) the same may be accepted for collection only by a licensed
bank or agent, and the latter will be held to be the source for the
purposes of the return of information.

The original ownership certificates, accompanied by the monthly 239'
list returns, in the case of interest on bonds of domestic and resident
corporations, when filed with the Commissioner of Internal Revenue
shall constitute and be treated as returns of information.

Art. 36. When the person receivipg a payment falling within the 240
Jjrovisions of law for information at the source is not the actual
owner of the income received, the name and address of the actual
owner shall be furnished upon demand of the person, corporation,
partnership, or association paying the income, and in default of a
compliance with such demand the payee becomes liable to a penalty
of not less than $20 nor more than $1,000.

Art. 37. The requirement of law for information at the source 241
shall not apply to the payment of interest on obligations of the
United States.

ASSESSMENT OF TAX.

Art. 38. The assessment of income tax shall be made by the Com- 242
missioner of Internal Eevenue and all persons shall be notified of the
amount for which they are, respectively, liable on or before the first
day of June of each successive year.

Three years' limitation. — The statute (sec. 9 (a), act Sept. 8, 1916) 243
does not require the assessment to be made within three years from
the time a return was due. The limitation is upon the discovery of
delinquency or error, within three years.

Amended return. — ^Where a further tax is found to be due as result 244
of audit of a return or agent's report, an amended return or waiver
will not be required, except where the discovery of the tax is inade
subsequent to the expiration of the three-year period of limitation.

Effective date of Treasury decisions.— Treasury decisions promul- 245
gating rulings of the Internal Revenue Bureau become effective upon
the date of approval unless otherwise stated therein. Cases pre-
viously adjusted in contravention of law as pronounced in such
decisions, are subject to readjustment in accordance with the decision. ■

COLLECTION OF THE TAX.

Art, 39. The tax is to be paid upon notice frorrx a collector of 248
internal revenue of the amount pf tax due and at all events not later
than June 15. As to all tax unpaid on June 15 and fo.- 10 days

4U IKCOMS TAX.

after notice and demand therefor, the penalty is 5 per cent of th©
amount of the tax unpaid and interest at the rate of 1 per cent per,
month upon such tax from the time the same became due, except
from the estates of insane, deceased, or insolvent pereons.

247 Payment of taxes. — An excess payment of tax in one year can not
be offset against an assessment of tax for a subsequent year.

248 Status of income tax. — Tax due on income has the status of a debt
due to the United States. Persons receiving property charged with
such indebtedness must answer for the debt.

249 Art. 40. Section 1009, act of October 3, 1917, provides that tax-
payers liable for income and excess-profits tax may make payments
of such taxes in advance, in installments or in whole of an amoimt
not in excess of the estimated taxes which will be due from them and
upon determination of the taxes actually due any amount paid in ex-
cess shall be refunded as taxes erroneously collected, and credit
against such tax so paid in advance may be allowed of an amount not
exceeding 3 per cent per annum calculated upon the amount so paid
from the date of such payment to the date now fixed by law for such
payment ; but no such credit shall be allowed on payments in excess
of taxes determined to be due, nor on payments made after four and
one-half months after the close of the taxable year. In case of under-
taking to pay tax in installments and default of any installment the
penalty for failure to pay tax when due will attach.

250 Rules for calculation of the 3 per cent credit on account of advance
payment of tax, or a reduction otherwise of the amount of tax as-
sessable on a return of income by means of advance payment, have
be-en prescribed by the Secretary of the Treasury by special regula-
tio-n. (T. D. 2622.)

251 Art. 41. In the payment of income tax a fractional part of a
cent shall be disregarded unless it amounts to a half cent or more, in
which case the fraction shall be increased to 1 cent.

252 Form 17. — Collectors should issue Form 17 for the purpose of
fixing definitely the date when the 5 per cent penalty accrues and
interest at 1 per cent per month begins to run, and a copy of this
notice should be filed as provided by act of August 17, 1912, amend-
ing section 3186, Revised Statutes.

PROCEDTJE.E IN CASES OF DELINQUENCY.

253 Art. 42. In cases of refusal or neglect to make return and in cases
of erroneous, false, or fraudulent returns the Commissioner of In-
ternal Revenue shall, upon the discovery thereof, at any time within
three years after said return is due or has been made make a return
ol income upon information obtained as provided for by law, or
require the necessary corrections to be made, and the assessment

rtfOOME TAX. 41

mado by the Commissioner of Internal Kevenue thereon shall be
paid by such person or persons immediately upon notification of the
amount of such assessment. If the amount of such assessment re-
mains unpaid for 10 days after notice and demand therefor by the
collector, there shall be added the sum of 5 per cent on the amount
of tax unpaid and interest at the rate of 1 per cent per month upon
such tax from £he time the same became due, except from the estates
of insane, deceased, or insolvent persons.

WITEHOLDDIG.

Art. 43. The withholding provisions of the income-tax law (sees. 254
9 (6) and (a) apply —

(a) To the normal income tax levied upon the entire net income 255
of nonresident aliens, of a fixed or determinable annual or period-
ical class, as interest, rent, salary, wages, etc., received by them from
aU sources within the United States. This tax is 2 per cent under
the act of September 8, 1916 (there is no exemption and none can
be claimed).

(S) To the normal income tax of citizens and resident aliens, 258
only when derived from interest on bonds and mortgages, deeds of
trust, or other similar obligations of corporations, associations, etc.,
which have a "tax-free covenant clause (i. e., a contract or provi-
sion by which the obligor agrees to pay any portion of the tax
imposed by this title upon the obligee or to reimburse the obligee in
any portion of the tax or to pay the interest without deduction for
any tax which the obligor may be l-equired or permitted to pay
thereon or to retain therefrom under any law of the United States) ,
regardless of the amount and period of payment.

The amount to be withheld is 2 per cent on the amount of pay- 257
ment, unless the person entitled to receive such interest shall file with
the vnthholding agent, on or before February 1, a signed notice in
writing claiming the benefit of an allowable exemption under sec-
tion 7, act of September 8, 1916, as amended.

(e) The tax to be deducted and withheld from nonresident alien 258
individuals in accordance with section 9 (b) and (c) for 1917 and
subsequent tax years is the 2 per cent normal tax imposed by the
act of September 8, 1916, as ainended.

On and after January 1, 1918, the normal tax of 2 per cent iln- 259
posed by the act of October 3, 1917, is the tax to be deducted and
withheld from citizens or residents of the United States in accord-
ance with section 9 (c).

Tax withheld from income other than bond interest will be sic- 260
counted for on income-tax Form 1042, and separate reports of the

42 INCOME TAX.

payments entered on Form 1042 will be made on Form 1098. 1
withheld from bond interest wilt be accounted for monthly on incoi
tax Form 1012, and an annual summary of these Avill be made
income-tax Form 1013. The annual return only will be verified.

261 Ownership certificates.— The owners of bonds of domestic and «
dent corporations shall, when presenting interest coupons for pi
ment, file a certificate of ownership for each issue of bonds, showi
the name and address of the debtor corporation, the name and s
dress of the owner of the bonds, whether the payee is married or i
head of a family, and the amount of interest.

262 Tax to be paid at the source. — Form 1000, revised, shall be used (
when no personal exemption is claimed against interest on bonds c(
taining a " tax-free " covenant by citizens or residents of the Unit
States; (&) by nonresident alien individuals, foreign corporatic
having no office or place of business in the United States whether
not such bonds contain a "tax-free" covenant; and (c) in the ci
where coupons are received not accompanied by certificates of owm
ship. The first bank receiving coupons not accompanied by owm
ship certificates will make a certificate crossing out " owner " a
inserting " payee " and will enter the amount of interest on line 4.

263 Tax not to be paid at the source. — Form 1001, revised, shall be us
(a) when personal exemption is claimed against interest on bon
containing a " tax-free " covenant by citizens or residents of t
United States, also when presenting coupons from bonds not cc
taining a " tax-free " covenant ; (&) by domestic partnerships, corpoi
tions, or associations; (c) by nonresident alien partnerships; a:
(d) by foreign corporations having an office or place of business,
the United States, whether or not such bonds contain a " tax-ire(
covenant.

264 In case a citizen or resident individual receives interest on bon
containing a " tax-free " covenant in excess of the amount of pt
sonal exemption which the individual may claim, any such exc«
must be reported on Form 1000, revised.

265 Substitute certificates.— Collecting agents, responsible banks a]
bankers receiving coupons for collection with ownership certifical
attached may present the coupons with the original certificates
the debtor corporation or its duly authorized withholding agent f
collection or the original certificates may be detached and f<
warded direct to the Commissioner of Internal Eevenue, provid
such collecting agent shall substitute for such certificate its own «
tificate and shall keep a complete record of each transaction sho
ing—

266 1- Serial number of item received.
2. Date received.

3. Name and address of person from whom received.

4. Name of •debtor corporation.

5. Class of bonds from ■which coupons were cut.

6. Face amount of coupons.

Fior the purpose of identification the substitute certificates shall 267
be numbered consecutively and corresponding numbers given the
original certificates of ownership.

Substitute certificates by collecting agents, banks, and bankers, in 268
lieu of original certificates of ownership accompanying coupons pre-
sented for collection shall be discontinued v/ith respect to ownership
certificates presented with coupons for collection by nonresident
alien individuals, firms, corporations, organizations, etc.

In all such cases the original certificates of ownership shall be 269
forwarded to the debtor corporation without substitution.

The debtor corporation or its duly authorized withholding agent 270
shall forward all certificates to the collector of internal revenue
with its duplicate monthly list return, Form 1012, revised, and such
collector shall forward the original return and the certificates to
the commissioner, as heretofore.

Art. 44. Until January 1, 1918, withholding was required under 271
the act of September 8, 1916, as amended, at the rate of 2 per cent.
On and after January 1, 1918, withholding provisions of the law
as to citizens and resident aliens (sec. 9-c, act Sept. 8, 1916, as
amended) will extend to the normal tax imposed by section 1, act
October 3, 1917. Thereafter the exemption which may be claimed
by citizens and resident aliens from withholding will be such as will
be allowable under section 3, act October 3, 1917.

;. Art. 45. Withholding will at alt times be limited to 2 per cent, 272
except in case of interest on corporate bonds owned by foreign cor-
porations having no office or place of business in the United States,
in which case deduction will be at the rate of 6 per cent.
;.- Art. 46. Return is to be made for the tax v/ithheld in manner and 273
on a form to be prescribed by the Commisisoner of Internal Revenue,
with the approval of the Secretary of the Treasury. This return
is to be made after February 1 and on or before March 1 annually.
The return shall show the* name and address of the withholding
agent, character of income, and the name and address of the recipient
or his agent, amount of income, exemption claimed-, and the amount
of tax at 2 per cent withheld thereon.

Art. 47. Any income withheld from a citizen or resident alien in 274
1917 prior to October 3, 1917, except in the case covered by section
9 (c) (from interest paid on securities having a tax-free covenant
clause") of the act of September 8, 1916, as amended, shall be re-
leased by the withholding agent and paid over to the individual
from whpm it was withheld or his proper legal representative.

44 , INCOME TAX. ]

275 The income upon which such tax was so deducted and releasee^
shall be included in the return, if any, of such individual for the
purpose of assessment and collection of the income tax.

LICENSE.

276 Art. 48. All persons, corporations, partnerships, or associations
undertaking as a matter of business or for profit the collection of
foreign payments of interest or dividends by means of coupons,
checks, or bills of exchange shall obtain a license from the Com-
missioner of Internal Eevenue, and shall be subject to such regula-
tions enabling the Government to obtain the information required
under this title as the Commissioner of Internal Revenue, with the
approval of the Secretary of the Treasury, shall prescribe ; and who-
ever knowingly undertakes . to collect such payments as aforesaid
without having obtained a license therefor or without complying
with .such regulations, shall be deemed guilty of a misdeameanor
and for each offense be fined in a sum not exceeding $5,000 or im-
prisoned for a term not exceeding one year, or both, in the discre-
tion of the court. Such licensee shall write or stamp on the face
of the item : " Information obtained and furnished by

■ (name of collecting agent)."

INTENT OF THE LAW.

277 Art. 49. The intent and purpose of the income-tax law is that all
gains, profits, and income of a taxable class shall be charged and as-
sessed with the corresponding income tax, normal and additional,
and such tax shall be paid by the owner of such income or the proper
representative thereof having the receipt, custody, control, or dis-
posal of the same. In any case where the conditions which obtaia
do not appear to fall within the law and regulations for the assess-
ment and collection of the income tax, the proper tax shall be, as-
sessed in the particular case by the Commissioner of Internal Eev-
enue upon his findings concerning the same. Ownership of income
and liability for tax thereon shall be determined as of the year for
wliich the return is required to be rendered.

EECORD TO BE KEPT.

278 Art. 50. Every individual, partnership, corporation, or association
liable to any tax imposed under the internal revenue laws of the
United States or for the collection thereof shall keep such records
and render such statements and returns, under oath, as shall be pre-
scribed by the Commissioner of Internal Kevenue.

INCOME TAX. 45

>.• PENALTIES.

Art. 51. For failure to make payment of tax before close of business 279
June 15 and 10 days after notice and demand. — There shall be added to
the tax 5 per cent on the amount of tax unpaid and interest at the
rate of 1 per cent per month froin the time the same became due,
except from the estates of insane, deceased, or insolvent persons.
(Sec. 9(a).)

And the delinquent shall also be liable for specific penalty of not 280
less than $20 nor more than $1,000., (Sec. 18.)

Art. 52. For failure to make return within time fixed by law for tax 281
or information purposes. — Penalties are :

Ad valorem,. — Fifty per cent on the amount of tax shown by a cor- 282
rect return. (Sec. 16, 3176, E. S.)
•.' Specip.— Not less than $20 nor more than $1,000. (Sec. 1 8.) 283

Liability of individuals to^ — 284

. Specific penalties provided by the income-tax law are held to
attach to the person and in case of death of "Such person are non-
enforceable.

Ad valorem penalties (those measured by income) attach to income 285
and are to be enforced regardless of the death of the owner of the
income by which the penalty is measured.

Waiver after expiration of time limit for assessment. — Where the 286
limitation of the statute as to assessment has run and a Avritten
waiver of exemption from assessment is given by the taxpayer, the
ad valorem penalties of 50 per cent, addition to tax, is not to be
assessed for delinquency in filing return.

Eetum made and mailed in tiine, — If a return is made and placed 287
in the United States mail, properly addressed, and postage paid, in
ample time, in due course of mail, to reach the office of the collector
or deputy collector on or before the last due date, no penalty will be
held to attach should the return not be actually received by such
officer until subsequent to that date.

Art. 53. For false or fraudulent return, or stateinent, willfully made 288
with intent to defeat or evade assessment of tax. — Penalties are :

Ad valorem. — One hundred per cent to be added to the amount of 289
the tax shown by a correct return. (Sec. 16, S176, K. S.)

Specific. — Fine as for misdemeanor, not exceeding $2,000 or im- 290
prisonment not exceeding one year or both, in the discretion of the
court, with the costs of prosecution. (Sec. 18.)

KEASONABLE CAUSE.

i Art. 54. Section 3176, Eevised Statutes, as amended by act of 291
September 8, 1916, provides that if after delinquency has ensued and
before receiving a notice from the collector of internal revenue, of
such dolinQuency and request for a return, the delinquent individual

46 INCOME TAX.

or corporation shall have filed with the collector of internal reve
a I'eturn and shall accpmjDany such return with a showing "that
failure to file it (in time) was due to a reasonable cause and no
willful neglect, no such addition shall be made to the tax."
g92 " Seasonable cause," for the purpose of this article of the reg
tions, is held to be such a condition of fact as had the taxpayei
default exercised ordinary business care and prudence it would h
been impracticable or impossible for him to have filed return on
prescribed time.

NOTICE.

253 What constitutes.— The " notice from the collector " provided
in subsection 3176 of section 16 of the act of September 8, 1916
the '■'■Twte or memorandum addressed to such person requiring i
or her to render to such collector or deputy collector the list or ret
required hy law within 10 days from the date of such note or me',
randum, venfied ly oath or affirmation," prescribed by subsect
3173 of said section 16 of the act of September 8, 1916.

294 Delinquent returns must be accompanied by an affirm.ative sh
ing of fact alleged as reasonable cause for excuse from 50 per (
penalty. The Commissioner of Internal Eevenue will pass upon
validity of the showing. The showing must be in the form of
affidavit, imder oath, and should be attached to the retui-n. '
penalty of 50 per cent " addition to tax " will be asserted in all ci
where the showing made is not approved by the Commissioner
Internal Eevenue.

296 The specific penalty, subject to the authority of the Commissic
of Internal Eevenue to entertain offers in compromise, is fixed
not less than $20 nor more than $1,000, and is asserted for refusa'
neglect to pay tax, to make a return, or supply information requi
under the income-tax law and at the time required, and is to
asserted independently of the penalty by way of " addition to
tax."

296 The limitation of penalty for refusal or neglect by section li
the act of September 8, 1916, as amended, to $1,000 is enlarged a;
corporations by section 14 (c) of the act of September 8, 1916, wl
places the limitation of amount of penalty for delinquency or fr
of and by corporations at $10,000, so that as to corporations
penalty for delinquency or fraud is not less than $20 nor more t
$10,000, and each officer of the corporation required by law to mi
render, sign, or verify any return who makes any false or f raudu
return or statement with intent to evade or defeat the assessmen
tax, will, in addition to and apart from the corporation, be sub
to prosecution, and on conviction to fine not exceeding ^2,000
imprisonment not exceeding one year, or both, in the discretioi
the court, with the costs of nroseciitioTi.

PART II.

INCOME-TAX REGULATIONS RELATING TO CORPORATIONS.

CONTENTS OF PART II— CORPORATIONS.

[See complete inilex at end ot volume.)

Page.

Corporations subject to tax, articles 55-56 41!

Definitions, articles 57-63 4i',

Foreign corporations, articles 64-66. ~. 5f,'

Corporations exempt from tax, articles 67-82 , 50

Income exempt from tax, articles 83-87 5'i

Gross income, articles 88-125 57

Deductions, articles 126-169 70

Expenses, articles 129-146 .-< 71

Losses, articles 147-158 76

Depreciation, articles 159-169 80

Depletion, articles 170-179:

Oil and gas properties, article 170 83

Mining corporations, articles 171-179 87

Interest, articles 180-190 91

Taxes, articles 191-195 93

Net income, articles 196-197 100

Credits, articles 198-199 100

Withliolding of tax at source, articles 200-202 101

Returns, articles 203-229 103

Collection and pa,yment of tax, articles 230-238 112

Insurance companies, article 239 115

Deductions, article 240 117

Life insurance companies, article 241 119

Mutual insurance companies, other than mutual life and mutual marine,

article 242 .'.... 120

Mutual marine insurance companies, article 243 121

Foreign insurance companies, article 244 121

Assessment life and accident companies; stock fire insurance companies; stock
casualty, fidelity, and surety insurance companies; miscellaneous stock com-
panies, articles 245-246 122

Claims, articles 247-275 122

Refund or abatement of income tax, article 247 122

Credit to collectors for taxes uncollectible, article 248 122

Preparation of claims for credit for taxes and penalties uncollectible,

form 53, article 249 123

Taxes in litigation, articles 250-256 124

Preparation of claims for the abatement of taxes and penalties under

remedial acts, article 257, section 3220 125

47

48 INCOME TAX.

Claims, articles 247-275— Continued. PaRe.

Form 47, articles 258-259 126

Allowances for credit for taxes abated, article 200 ■'^27

Filing of a claim for abatement does not operate as a delay of collection,

article 261 - - - ■ 127

Penalty of 5 per cent and interest at the rate of 1 per cent a month, articles

262-263 128

Duplicate charges, article 264 1 128

Preparation of claims for refunding taxes and penalties, form 46, articles

265-266 ■ - - ■ - 129

Payment of claims allowed, article 267 129

Deductions of amounts due by claimants, etc., articles 268-273; statutes of

limitation, article 269 130

Claims for sums recovered'by suit, articles 274-275 132

COEPOEATIONS SUBJECT TO TAX.

597 Art. 55. Domestic corporations tax under act of September 8, 1916.—
Under the provisions of Parts II and III of Title I of the act of
September 8, 191G, as amended, every corporation, joint-stock com-
pany or association or insurance company organized in the United
States, no matter how created or organized, except those specifically
exempt tmder section 11 of this title, shall be subject to pay annually
an income tax of 2 per cent upon the entire net income i-eceived
during the i^receding calendar or fiscal year, as the case may be.

J98 Art. 56. War income tax under act of October 3, 1917.— Under Title I
of the act of October 3, 1917, an additional tax of 4 per cent, known
as the war income tax, is similarly imposed on the net income of
such corporations, except that for the purpose of the assessment of
the additional 4 per cent tax the net income of such corporations
shall be credited with the amount of dividends received from other
corporations subject to tax under Title I of the act of September 8,
1916, as amended, and the act of October 3, 1917.

DEFINITIONS.

599 Art. 57. Corporations defined. — " Corporation " or " corporations,"
as used in these regulations, shall be construed to include all corpora-
tions, joint-stock companies and associations, and all insurance com-
panies coming within the terms of the law, as well as all business
trusts organized or created for the purpose of engaging in commercial
or industrial enterprises, the capital of which is evidenced by certifi-
cates or shares of interest issued or issuable to members on the basis
of which profits are distributed or distributable. Such organizations
will be hereinafter referred to as corporations.

500 Art. 58. Joint-stock companies and associations defined. — The terra
" ioint-stock companies " or " associations" shall include associatio:

INCOME TAX, 48

common-law trusts, or organizations by whatever name Imown which
carry on or do business in an organized capacity, whether created
under and pursuant to State laws, trust agreements, declarations of
irust, or otherwise, the net income of which, if any, is distributed
or distributable among the members or shareholders on the basis of
the capital stock which each holds, or, where there is no capital stock,
on the basis of the proportionate share or capital which each has, or
has invested, in the business or property of the organization, all of
which joint-stock companies or associations s'hall in their organized
capacity be subject to the tax imposed by this act, and shall make
returns of annual net income accordingly.

Art. 59. The terms " taxable year " or "taxable period " as and 301
when used in these regulations shall mean the calendar or duly estab-
lished fiscal year or period for which the return is made or is required
to be made.

The term " this title " when used in these regulations means Title 1 302
of the act of September 8, 1916, as amended by the act of October 3,
1917.

Art. 60. Incomplete corporations'.^— Corporations which have' applied 303
for but have never received charters and corporations which have
received charters but never perfected their organizations and which
as entities have transacted no business and had no income whatever
from any source may, upon presentation of the facts to the collector,
be relieved from the necessity of making returns, so long as they
remain in this unorganized condition. In the absence of a showing
to this effect to the collector of internal revenue, such companies will ' '
be required to make returns and will be liable to the penalties of tlie
law for failure to do so.

Art. 61. Corporation dissolved prior to October 4, 1917. — A corpora- £04
fion which was dissolved in 1917, prior to passage of the war-revenue
act of October 3, 1917, is subject to tax under the act of September
8, 1916, as amended, and also to the war income tax and the war
excess profits tax imposed by the act of October 3, 1917 (Brady et al.
V. Anderson, 240 Fed., 665). A corporation so situated will make
a return on revised form 1031, covering the period in 1917 during
which it was in business prior to its dissolution. If it shall have
previously made a return covering this period and shall have paid
any excess profits tax under the act of March 3, 1917, it shall be
entitled to credit for the amount of such tax so paid against any
excess profits tax assessable against it under Title II of the act of
October 3, 1917.

Art. 62. Limited partnerships. — ^Limited partnerships — that is, part- 305
nerships having one or more special partners who may share in the
profits of the firm but whose liability for the debts of the company

33272°— 18 1

50 INCOME TAX.

is limited to the amount of capital invested by such special partner
or partners — are held to be associations within the meaning of this
title, and as such are required to make returns of annual net income
and pay any tax thereby shown to be due. The income received by
the m.embers out of the earnings of such limited partnerships will be
treated in their personal returns in the same manner as if it were
dividends on the stock of corporations and will be subject to the
additional or surtaxes in the hands of the recipient.

306 Art. 63. Common-law partnerships. — Common-law partnerships are
not associations within the meaning of income-tax law, and are
therefore not required to make returns for the purpose of the in-
come tax except as they may be requested by the Commissioner of
Internal Ee venue or by any district collector to Inake returns of
their earnings, profits, and income.

FOREIGN CORPOIIATIONS.

307 Art. 64. Taxable income. — Under section 10 of Title I of the act
of September 8, 1916, as amended, a tax of 2 per cent shall be levied
assessed, collected, and paid annually upon the total net income re-,
ceived in the preceding calendar year, from all sources within the
United States, by every corporation, joint-stock company or associa-
iion or insurance company organized, authorized, or existing under
the laws of any foreign country.

308 Art. 65. War income tax. — The additional tax of 4 per cent or net
income imposed by the act of October 3, 1917, shall apply to foreign
corporations in the same manner as in the case of domestic corpora-
tions, except that it shall apply only to income received from sources
within the United States.

309 Art. 66. Source within United States. — It is not necessary that the
foreign corporation shall be engaged in business in this country or
that it have an office, branch, or agency in the United States.
Liability to the .tax attaches with respect to the income, the source
of which is in the United States.

310 " Source " as here used means the place of the origin of the income.

311 Every foreign corporation having income from sources within
the United States must make returns of annual net income in
accordance with the rule set out in section 12 (6) of the act of
September S, 1916, as amended by the act of October 3, 1917.

COEPOEATIONS EXEMPT FROM TAX.

312 Art. 67. Conditional.— Corporations or associations organized and
operated exclusively for religious, charitable, scientific, or' educa-
tional purposes, business leagues, chambers of commerce, boards of
trade, civic leagues, cemetery companies, and pleasure and recreation

INCOME TAX. ' 51

clubs, are not, as such, exempt from the requirements of this title.
Their exemption is conditional, and in order to be relieved from
liability under the law they must file with the collector of internal
' revenue an affidavit setting out the character and purpose of the or-
ganizations, and showing that no part of any income which they re-
ceive inures to the b&nefit of any private stockholder or indi-
vidual, and that such income is used exclusively for the promotion
of the purposes for which organized as indicated in tlie particular
paragraphs under which exemption is claimed.

Art. 68. Unconditional. — Among the corporations exempt from the 313
tax, without condition, are labor, agricultural and horticultural or-
ganizations, mutual savings bank not having capital stock repre-
sented by shares, fraternal beneficiary society, order, or association
operating under the lodge system or for the exclusive benefit of the
members of a fraternity itself operating under the lodge system,
domestic building and loan associations, Federal land banks, and
national farm loan associations, organized pursuant to the act of
July 17, 1916, joint-stock land banks as to income specified in the
law, and public utilities whose income inures to the benefit of any
State, Territory, or political subdivision thereof.

In all cases wherein the exemption is without condition, and the 314
collector is satisfied that the Organization comes within the exempted
class, he will be authorized to eliminate it from his list and relieve it
from the necessity of making returns.

Corporations exempt under the act of September 8, 1916, are also 3^5
exempt from the war income tax imposed by Title I of the act of
October 3, 1917.

' Art. 69. Mutual insurance companies, etc. — The organizations men- 3ig
tioned in paragraph " tenth " of section 11, act of September 8,
1916, as amended, are specifically exempt, provided that their entire
income consists solely of assessments, dues, and fees collected from
members for the solo purpose of meeting expenses, incurred in pur-
suance of the purpose for which organized. If any of such organiza-
tions have income from any source other than assessments, dues, and
fees, such income will be held to be subject to tax, and the organiza-
tions receiving the same will be required to make returns and to pay
any tax thereby shown to be due. (T. D. 1933, 2152, 2161.)

Art. 70. Domestic building and loan associations. — A domestic build- 317
ing and loan association entitled to exemption is one organized under
and pursuant to the laws of the United States or under and pur-
suant to the la,ws of some State or Territory thereof, and which is
actually carrying on for the benefit of its members a building and
loan association business in accordance with the laws under Avhich it
is organized. The fact that such an association issues fully paid or
prepaidi shares, calling for a specified rate of interest or dividends,

O'A INCOME TAX..

will not disqualify it for exemption. The exemption is without quali-
fication other than that the association is a domestic building and^
loan association. If a corporation by any other name is carrying|
on an exclusive building-and-loan business, before it is entitled to
exemption it will be incumbent upon it to show to the satisfaction
of the com.missioner of internal revenue that it is in fact a building
and loan association.

318 Art. 71. Cemetery company. — A cemetery company having" a capital
stock represented by shares, or which is operated for profit or for
the benefit of others than its members, does not come within the
exempted class, and will be required to make returns of annual net
income and pay any income tax thereby shown to be due.

319 In the case of such company a reserve set aside out of profits as
a " maintenance fund " is not deductible from gross income, and any
accretions to such fund will be held to be income and, as such, must
be returned by the corporation. The expenses of maintenance will
be deductible as they are paid.

320 Art. 72. Social clubs. — Social clubs organized and operated exclu-
sively for pleasure, recreation, and other nonprofitable purposes are
exempt from the tax, provided no part of any net income which they
receive inures to the benefit of any private stockholder or indi-
vidual. This exemption will reach practically all social and recrea-
tion clubs which are supported by membership fees, dues, and
assessments.

321 If a club, by reason of the comprehensive powers granted in its
charter, engages in traffic, in agriculture, or horticulture, in the sale
of real estate, timber, etc., for profit, it will be held that such club
is not organized and operated exclusively for pleasure, recreation,
or social purposes. It thus becomes a business or commercial enter-
prise, and any profit realized from such activities is subject to the
tax imposed by this title, and the club so operated must make returns
of annual net income.

322 Art. 73. Labor, agricultural and horticulttiral organizations.— Agricul-
tural or horticultural organizations, which are exempt under this
title, do not include those corporations engaged in growing agricul-
tural or horticultural products, raising live stock or similar products
for profit, but will include only those organizations which, having
no net income inuring to the benefit of their members, are educational
or instructive in character, and which have for their purpose the
betterment of the conditions of those engaged in these pursuits, the
improvement of the grade of their products, and the encouragement
and promotion of those industries to a higher degree of efficiency.
(T. D. 2090.)

S23 Included in this class as exempt are those organizations such as
county fairs and like associations of a quasi-public character, which,

INCOME TAX. 53

ihrough a system of awards, prizes, or premiums, are designed to
sncourage the production of better live stock, better agricultural and
lorticultural products, and whose income, derived from gate receipts,
jntry fees, donations, etc., is used exclusively to meet the necessary
ixpenses of upkeep and operation.

Societies or associations which have for their purpose the holding 324
jf annual or periodical race meets, and from which profits inure or
may inure to the benefit of the members or stockholders do not come
within the terms of this exemption.

Art. 74. Societies not agricultural or horticultural. — A corporation en- 325
2;aged in the business of raising stock or poultry, or growing grain,
fruits, or other products of this character, as a means of liveli-
[food and for the purpose of gain, is an agricultural or horticultural
society only in the sense that its name indicates the kind of business
in which it is engaged and, as such, is not exempt from the require-
ments of the law, and must make returns and pay any income tax
thereby shown to be due. (T. D. 2090.)

Art. 75. Cooperative associations defined. — Cooperative associations, 326
n order to come within the exemption provided in paragraph
' eleventh " must establish to the satisfaction of the collector or Com-
missioner of Internal Revenue the fact that, for their own account,
;hey have no net income, their business being to market the products
3f their members, and that the entire proceeds of such marketing,
less necessary selling expenses, are turned back or paid to the mem-
Ders on the basis of the quantity of produce furnished by them —
quality and grade being considered-^as the purchase price of such
produce.

If in the course of their business such associations purchase for 327
cash at a stipulated price articles of produce with a view to selling
them for gain, it will be held that such associations are organized
for profit and such associations will be required to make returns of
mnual net income and include therein, for the purpose of the tax,
ill income derived from such transactions. (T. D. 2090.) If
amounts paid to members are based solely upon the quantity of prod-
uce furnished, such amounts may be deducted from the gross pro
eeeds of sales, and the taxable net income will be the amount of earn-
ings passed to surplus, or distributed or distributable among mem-
i>ers on the basis of their stock holdings.

Art. 76. Cooperative dairy defined. — Cooperative dairy companies or 328
issociations not having capital stock and engaged in collecting milk
md disposing of the same or the products thereof, and distributing
the proceeds of the business, less necessary operating expenses, among
their patrons, upon the basis of the quantity of butter fat in the milk
furnished by such patrons, are held to be exempt from the tax im-
posed by this title.

54 INCOME TAX.

329 If, however, a dairy company purchases milk at a stipulated price
and disposes of the same, or its products, through sale or otherwise,
at a profit, and such profit inures to the benefit of the company
or its members, on any basis other than the butter-fat content of milk
furnished, such company will come within the requirements of the
law, and will be subject to the tax. (T. D. 1996.)

330 Art. 77. Lodge system defined. — A society or association " operating
under the lodge system" is one organized under a charter or dis-
pensation with properly appointed or elected officers, with an adopted
ritual or ceremonial, holding meetings at stated intervals. An order,
society, or association coming within this definition is exempt from
the requirements of the income-tax law.

331 Art. 78. ftualifications for exemption. — In every instance wherein
exemption is conditioned upon the ground that no part of the net
income received by corporations inures to the benefit of any private
stockholder or individual, it will be necessary, before such organiza-
tions will be classed as exempt, for them to show to the satisfaction
of the collector or the Commissioner of Internal Revenue:

(1) The character and purpose of the organization ;

(2) The source from which all its income is derived;

(3) What disposition is made of such incomes; and

(4) Whether or not any of it is credited to surplus or inures or
may inure to the benefit of any private stockholder or individual.

332 Art. 79. Organizations, exemption doubtful. — Any corporation which
entertains any doubt as to its status under the law, for the reason
that it does not clearly come within one or another of the classes of
those specifically enumerated as exempt, should, within the pre-
scribed time, file a return and attach thereto for the consideration of
the collector, a statement setting out fully the nature and purpose of
the organization, the source of its income, what disposition is made
of it, and particularly of any surplus which it may receive over and
above its reasonable needs.

333 If the coUecter is in doubt, he will refer the statement and return
to the Commissioner of Internal Revenue for decision, and withhold
listing for assessment until a decision is reached. (T. D. 2090.)

334 Art. 80. Exemption established. — When a corporation or organiza^
tion has established its right to exemption under any of the para-
graphs of section 11 of this title, it will be unnecessary for it to
make a return or to make any further showing thereafter with re-
spect to its status under the law, unless it chan^«s the character of
its organization or the purpose for which it was originally createdis

335 Collectors will keep a list of all corporations Vifhose exemption is
conditional, to the end that they may occasionally inquire into their
status and ascertain whether or not they are violating the conditions '
upon which their exemption is predicated.

IN'COME TAX. ■ lis

Art. 81. Exempt corporations required to withhold. — While the or- 336
ganizations enumerated in section 11 of this title are themselves
exempt from the tax on any income received by them, they are not
exempt from the requirements of the title with respect to the with-
holding of the normal tax on bond interest or dividends paid to
foreign corporations or bond interest paid to individuals on bonds
having a tax free covenant or from furnishing information in ac-
cordance with the provisions of this title, as amended by section
3205 of Title XII of the act of October 3, 1917. (T. D. 2407.)

Art. 82. Rate of taxation, fiscal year ended during 1916. — The rate 337
imposed by Title I of the act of September 8, 1916, 2 per cent, shall
apply to the total net income received by every taxable corporation,
joint-stock company or association, or insurance company, in the
calendar year 1916 and in each year thereafter, except that if it has
fixed its own fiscal year under the provisions of the existing law, the
foregoing rate shall apply to the proportion of the total net income
returned for the fiscal year ending prior to December 31, 1916, which
the period between January 1, 1916, and the end of such fiscal year
bears to the whole of such fiscal year. The rate of 1 per cent shall
apply to the remaining portion of the total net income returned for
such fiscal year.

Prorated for fiscal year. — For. the purpose of the 4 per cent addi-33S
tional tax imposed by the act of October 3, 1917, it is provided that
in. the case of a corporation making its return on the basis of its oAvn
fiscal ycL^.r (other than the calendar year) this tax, for a fiscal year
ending during the calendar year 1917, shall be levied only on that
proportion of its net income (less dividends received) which the
period from January 1, 1917, to the end of the fiscal year bears to the
entire fiscal year. •

J If the last previous return was made for the period ended Decern- 339
ber 31, 1916, and a return is made for a fiscal period ended with the
last day of some month in 1917, the tax will be computed on the entire
net income so returned." Also in the case of a new corporation mak-
ing a return for the period from the date of its organization to the
close of the calendar year, the tax will be computed on the entire net
income so returned.

INCOME EXEMPT FROM TAX.

, Art. 83. Obligations of State. — Among the incomes exempt from the 340
provisions of this title is that derived from interest upon the obliga-
tions of a State or any political subdivision thereof.

A political subdivision as here used is held to mean a district, di- 341
vision, or community created by proper State authority and which,
by virtue of such authority is vested with power to exercise certain

IJXUUJKllS XAi.

governmental functions, such as prescribing regulations for its gov-
ernment, the exercise of certain police powers, the assessment and
collection of taxes, etc.

342 Art. 84. Political subdivision.— Obligations issued by the duly con-
stituted authorities of such a community so organized and empowered
are the obligations of a political subdivision of the State and inter-
est received on obligations of this character is exempt from the taxes
imposed by the acts of September 8, 1916, and October 3, 1917. How-
ever, a district without power to exercise any governmental function,
created for the purpose of making some improvement, primarily
beneficial to the property located in and comprising the district, is
not, within the meaning of these acts, a political subdivision of the
State. Obligations issued in payment for such improvement, al-
though guaranteed by a county, municipality, or other political sub-
division of the State, are not the obligations of the State or of any
political subdivision thereof; but are rather the obligations of the
benefited property upon which they constitute a lien. Hence, the in-
come derived from obligations, which are a direct charge against or
lien upon benefited property, is not exempt from these taxes, and
must be returned as income of the recipient. (T. D. 1946.)

343 Art. 85. Obligations of the United States.— Section 1200 of the act of
October 3, 1917, so amends section 4 ,of the act of September 8, 1916,
as to exempt from the tax, interest on the obligations of the United
States issued after September 1, 1917, only if and to the extent pro-
vided in the act authorizing their issue.

344 United States bonds and certificates issued under the act of September
24, 1917. — Said act provides that bonds and certificates issued there-
under shall be exempt from all taxes except estate or inheritance
taxes, additional income taxes, commonly known as surtaxes, and
excess or war profits taxes. Under this act the income from such
bonds is exempt from the war income tax of 4 per cent imposed upon
the net income of corporations by section 4 of Title I of the act of
October 3, 1917, and the 2 per cent tax imposed by section 10 of
Title I of the act of September 8, 1916, as amended.

345 Art. 88. Dividends, Federal reserve bank. — The Federal reserve stat-
ute, section 3, of the act of October 22, 1914, provides that Federal
reserve banks and the capital stock and surplus therein, are exempt
from taxation.

346 Under this provision of law the exemption provided for in the
Federal reserve act attaches to and follows the income derived from
dividends on stock of Federal reserve banks into the hands of stock-
holders, that is to say, the dividends received on the stock of Federal
reserve banks are exempt from the taxes imposed by the acts of Sep-
tember 8, 1916, as amended, and of October 3, 1917. >

INCOME TAX. fi*

This ruling does not contemplate, however, that dividends paid 347
by member banks are exempt from the 2 per cent tax imposed by this
title, but such dividends, in so far as they may be received by other
corporations, may be treated as a credit against net income in com-
puting the war income tax imposed by Title I of the act of October
3, 1917.

Art. 87. Foreign Governments. — Section 30 of the act of September 348
8, 1916, as amended by the act of October 3, 1917, provides that the
income of foreign Governments received from investments in the
United States in stocks, bonds, or other domestic securities owned by
them, or from interest on deposits in banks in the United States of
money belonging to such foreign Governments, is exempt from the
tax imposed by this title. This does not, however, exempt from the
tax any income collected by foreign Governments from investments
in the United States in stocks, bonds, or other domestic securities,
wliich are not bona fide owned by but are loaned to such foreign
Governments. The exemption here provided for is predicated upon
the fact that the securities or moneys from which income is derived
are actually owned by such foreign Governments.

GROSS INCOME.

I

Art. 88. Gross income defined. — Gross income embraces not only the 349
operating revenues but also income, gains, or profits from all other
sources, such as rentals, royalties, interest, and dividends from stock
owned in other corporations; and also profits made in other cor-
porations ; and also profits made from the sale of assets, investments,
etc. A true and accurate record of all income received, as well as
of all disbursements or charges against income, should be kept, in
order that it may be identified and verified by an internal-revenue
officer if an examination of the books should be deemed advisable.

Art. 89. Interest on bonds and dividends. — Gross income from sources 350
within the United States as applied to foreign corporations shall
include interest received on bonds, notes, or other interest-bearing
obligations of residents, corporate or otherwise, as well as income
derived from dividends on capital stock or from the net earnings
of resident corporations, joint-stock companies, or associations, or
insurance companies, subject to tax under this title, and likewise
income from rentals and i-oyalties, from business transacted or
capital invested in the United States.

Art. 90. Banks and financial institutions. — Gross income of banks and 351
other financial institutions consists of the total revenue received
within the year for which the return is made from the operation
of the business, including income, gains, or profits from the sals
•f capital assets and from all other sources.

XXNUWiVlli JLAiiL,

152 In cases where securities or other assets, real, personal, or mixed,
acquired prior to March 1, 1913, are disposed of during the year,
the gain or loss thereon will be based upon the difference between
the price at which disposed of and the fair market price or value of
such assets as of March 1, 1913, or the difference between the price
at which disposed of and the cost if acquired subsequent to that
date.

53 Art. 91. Manufacturing corporations. — Gross income for the pur-
pose 01 returns of manufacturing companies shall consist of the
total sales plus the inventory at the end of the year less the sum of
the cost of goods or materials purchased during the year and the
inventory at the beginning of the year. Instructions as to how in-
ventories shall be taken will be included in special regulations to be
furnished upon application to the collector of internal revenue. To
the gross manufacturing income should be added the income, includ-
ing dividends, received from other corporations, and gains or profits
from all sources.

54 Art. 92. Mercantile corporations. — For the purpose of returns gross
income of mercantile companies shall consist of the total sales plus
the inventory at the end of the year less the sum of the cost of
goods purchased during the year and the .inventory at the beginning
of the year. As to method of taking inventory, see pret.-eding para-
graph. To the amount of income thus ascertained should be added
the income, gains, or profits derived from all other sources.

bb All sales made during the year, vi'hether compensated for by
accounts receivable, bills receivable, cash, or other property at a de-
termined cash value, must be included in gross income of the year
in which the sales were made.

56 Art. 93. Miscellaneous corporations. — Gross income of miscellaneous
corporations consists of total revenue derived from the operation
and management of the business and property of the corporation
making the return, together with all amounts of income, including
the income, gains, or profits from all other sources, including divi-
dends received.

57 Art. 94. Income from damages recovered. — When a corporation as. a
result of suit or otherwise secures payment for damages which it may
have sustained, and the amount -oi such payment is in excess of an
amount necessary to make good the damage or damaged property,
the amount of such excess shall be considered and returned as income
for the year in which received. If the entire or an estimated amount
of the damage shall have been previously charged oft' and deducted
from gross income, then the amount recovered shall be returned as
income.

INCOME TAX. 59

■ If the amount recovered is less than the damage sustained or less
than an amount necessary to make good the damage, the difference
between the actual amount of damage sustained and the 'amount re-
covered will be deductible as a loss.

Art. 95. Proceeds of sale of rigKts income. — In cases wherein corpora- 358
tions desiring to secure additional capital propose to issue and sell
further shares of stock, reserving to their stockholders the right to
subscribe for, at par or any other stipuated price, a certain number
of shares of the new stock issue, proportioned to the number previ- 359
ously held, and if such stockholders shall sell their rights, it will be
held that the proceeds of such sale are in their entirety income for
the year in which the rights are sold, and should be so returned by
the stockholders, whether they be individuals or corporations.

Art. 96. Voluntary payments by stockholders. — In eases wherein a
corporation requires additional funds for conducting its business
and obtains such needed money through voluntary pro rata payments
by its stockholders, and such amounts received are credited to its
surplus account or to a special capital account, the amounts so re- 360
ceived will not be considered income, although, as representing this
additional fund, there is no increase in outstanding shares of stock
or liability of the corporation. The payments under such circum-
stances are in the nature of voluntary assessments upon, and repre-
sent an additional price paid for, the shares of stock held by the
individual stockholders^ and will be treated as an addition to and as
a part of the operating capital of the company.

Art. 97. Sale of capital stock. — The proceeds from the sale by a cor-
poration of its shares of capital stock, whether such proceeds be in
excess of or less than the par value of the stock subscribed for and
issued, constitute the capital of the company.

If the stock is sold at a premium, the premium is not income. 361
Likewise, if the stock is sold at a discount, the amount of the dis-
count is not a loss deductible from operating income.

Art. 98. Treasury stock — When taxable. — Treasury stock, wherever
and whenever that term is used in connection with the accounts of the 362
corporation or for income-tax purposes, will be held to mean stock
which had been previously issued by the corporation and which had
been repossessed by it through purchase or otherwise and then car- 363
ried on its books as an asset. If such stock is resold at a price in
excess of its cost upon repossession, such excess shall be returned as
income for the year in which resold. Unissued stock, which had been
retained by the corporation for the purpose of future sale, will not,
for ths purpose of the income tax, be considered "Treasury stock,"
and when sold no part of the pi'oceeds of such sale will be cpnsidered
taxable income. Nor will there be any deductible loss if .such stock is
sold at a price less than par.

60 INCOME TAX.

364 Art. 99. Donations to corporations of capital stock. — If, for the pur-
pose of enabling a corporation to secure working capital or for any-
other purpose, the stockholders donate or return to the corporation
to be resold by it certain shares of stock of the company previously
issued to them, the sale of such stock will be considered a capital
transaction, and the proceeds of such sale will be treated as capital
and will not constitute income to the corporation.

365 Art. 100. Interest on TJnited States bonds and certificates. — The inter-
est received on all TJnited States bonds and certificates exempt from
normal income tax, need not be included in the gross income in the
return made for the purpose of the income tax (2 per cent) qr the
war income tax (4 per cent), but interest on bonds and certificates
issued under the act of September 24, 1917, in excess of the interest
on $5,000 aggregate principal amount of such bonds and certificates
must be included in the net income upon which the war excess-profits
tax is computed.

366 Art. 101. Income from sale of capital assets. — If a corporation sells
its capital assets in whole or in part, it will include in its gross income
for the year in which the sale was made an amount equivalent to the
excess of the sales price over the fair market price or value of such
assets, as of March 1, 1913, if acquired prior to that date, or over
cost if acquired subsequent to that date.

367 If the purchase price is paid with stock issued by a purchasing com-
pany, the purchase price will be the actual value at the time of the
stock issued in payment for such assets.

368 Art. 102. Leased properties. — When a corporation shall have leased
its property in consideration that the lessee shall pay in lieu of
rental sn amount equivalent to a certain rate of dividend on its
capital stock or the interest on its outstanding indebtedness, together
with taxes, insurance, or other fixed charges, such payments shall
be considered rental payments and shall be returned by the^ lessor
corporation as income, notwithstanding the fact that the dividends
and interest are paid by the lessee direct to the stockholders and
bondholders of the lessor. The lessee, in making these payments
direct to the bondholders and the stockholders, does so as the agent
of the lessor, and the latter is none the less liable to return the
amounts thus paid as income and to pay any tax that may be due
thereon. (T. D. 2620).

369 The fact that a corporation has conveyed or let its property and
has thus parted with its management and control or has ceased to
engage in the business for which it was originally organized will not
relieve it from liability to income tax. If it has or may have income
directly or indirectly from any source, it must make a return, account
for all such income, and pay any tax assessable upon such income.-

INCOME TAX. 61

Art. 103. Income to bondholders and stockholders.— "While the pay- 370
ments made by the lessee direct to the bondholders or stockholders
are rentals to both it and the lessor, rentals paid in one case and
rentals received in the other, to the bondholders and the stockholders
they are interest and dividend payments received as from the lessor,
and as such will be accounted for in their returns of annual net
income.

Art. 104. Stock trust certificates.— ^Stock trust certificates or leased 371
line certificates, as the case may be, issued by the lessee for the pur-
pose of securing or holding control of the stock of the lessor are
held to be issued in lieu of the certificates of capital stock, and for
the purpose of this tax will be treated as capital stock and the
amounts received by the holders of these certificates are dividends
to the holders, to be treated as rentals by both lessee and lessor and
constitute an- allowable deduction in the one case and an item of
income in the other, accordingly as they are paid and. received.

Art. 105. Dividends — ^When taxable. — Section 10 of this title specifi- 372
cally sets out that corporations shall return as gross income all
income received from all sources during the year for which the
return is made. Among the items to be included in income arc
dividends on stock and interest on bonds or other interest-bearing
obligations received from other corporations. Such dividends are,
however, not subject to the war income tax of 4 per cent.

Art. 108. Dividend defined. — The term ""dividends " shall be held 373
to mean any distribution made or ordered to be made by a corpora-
tion^ joint-stock company or association, or insurance company, out
of its earnings or profits accrued since March 1, 1913, and payable
to its shareholders whether in ca,sh or in stock of the corporation,
joint-stock company or association, or insurance companyj which
stock dividend shall be considered income, to the amouat; of the
earnings or profits so distributed.

Art. 107. Any distribution made to shareholders in the year 1917 374
or subsequent years (except any distribution of dividends made prior
to Aug. 6, 1917, out of earnings or profits accrued prior to Mar. 1,
1913) shall be deemed to have been made from the most recently
accumulated undivided surplus or profits, and shall constitute in-
come of the distributee for the year in which received, and shall be
taxed to such distributee at the rates prescribed by law for the years
ill which such surplus or profits were earned by the distributing cor-
poration.

Thus, if a corporation distributed dividends in 1917, such di^d- 375
donds will be deemed to have been paid from the earnings of 1917,
and tlic recipient, if an individual, will be liable to additional tax,
if any, and if- a corporation, to income tax, at the rates for the year

t)2 INCOME TAX.

1917, unless it is shown to the satisfaction of the Commissioner of
Internal Eevenue that at the time such dividends Avere paid, the
earnings up to that time were not suffkient to cover the distribution,
in which case the excess over the earnings of the taxable year will ba
deemed to have been paid from the most recently accumulated sur-
plus of prior years, and will be taxed at the rate or rates for the
year or years in which earned.

376 A corporation declaring and paying dividends out of a surplus or
earnings accumulated over a period of years, should make a record
in its books of the amount of dividends paid out of each year's un-
distributed surplus or profits, and advise the stockholders accord-
ingly, in order that the dividends received by them may be taxed at
the respective rates prevailing during the years in which the surplus
or profits so distributed were earned.

377 The provisions of section 31, subdivision (6) do not apply to dis-
tributions made prior to August 6, 1917, out of earnings or profits
accrued prior to March 1, 1913 ; that is to say, that such distributions
will not be deemed to have been made out of the most recently ac-
cumulated surplus or profits, if at the time of distribution, before
August 6, 1917, they were specifically declared to be out of accumu-
lations prior to March 1, 1913.

378 Art. 108. Warrants of city, etc. — In cases Avherein warrants aro
issued by a city, town, or other political subdivision of a State, and
are accepted by the contractor in payment for public work done, the
face value of such warrants must be returned as income for the year
in which they are received. If, for any reason, the contractor upon
conversion of the warrants into cash, does not receive and can not
recover the full face value of the warrants so returned, he may
allowably deduct from gross income for the year in which the war-
rants are converted into cash, any loss sustained, which less will be
measured by the difference between the face value of the warrants
returned as income and the amount actually received for them in
cash, or its equivalent, when redeemed or disposed of.

379 Art. 109. Sale of patents. — ^A corporation disposing of patents by
sale, should determine the profit or loss arising therefrom, by com-
puting the difference between the selling price and the cost, or value
as of March 1, 1913, if acquired before that date. The apparent
profit or loss should be increased or decreased, as the case may be,
by the amounts deducted since March 1, 1913, as a return of capital
invested in such patents.

380 Art. 110. Bad debts recovered. — Bad debts or accounts charged off
by a corporation because of the fact that they were determined to bo
worthless, and subsequently recovered, constitute income for the year
m A\hich recovered, regardless of the date when the amounts were
charged off. Neither the date at which the debt was charged off

INCOME TAX. 63

nor the fact that it was or was not deducted from gross income in
any return made for tax purposes, will in any way affect its char-
acter as income of the year in which recovered.

Art. 111. Exchange of property for stock.- — In cases wherein property 381
was taken over in exchange for the capital stock of a corporation at
a par value in excess of the fair market value of the property, and
such property should be later sold, it will be necessary to ascertain
as nearly as possible the fair market value of the property at the
time it was taken over or as of March 1, 1913, if acquired before
that date, and any excess over this ascertained fair market value at
which the property is sold will be held to be profit or income to the
corporation for the year in which the sale was made.

Art. 112. Excess value. — Similar action may be taken in cases 382
wherein corporations acquire property prior to March 1, 1913, for a
mere nominal sum and which had, as of March 1, 1913, a value greatly
in excess of such nominal sum. A careful estimate of the fair market
value of such property as of March 1, 1913, may be made and set up
as the capital invested in the property, and if such property is there-
after disposed of at a price in excess of such fair market value, the
amount so in excess will be treated as income to be accounted for in
preparing the return of annual net income of the year in which the
property is sold. The value of the property fixed in the manner and
for the pui-pose hereinbefore indicated will be subject to the approval
of the Commissioner of Internal Revenue.

If the property was acquired subsequent to March 1, 1913, the 383
amount for which it is later sold or disposed of in excess of the cost
price, regardless of the fact that it may have been acquired for a
mere nominal price, will constitute income for the year in which the
property was disposed of and must be so returned.

Art. 113. Royalties from patent rights.- — Eoyalties received by a cor- 334
poration in accordance with a contract by which it has assigned the
patent rights to manufacture machines, etc., are income and should
be so accounted for. The owner of the patent may deduct from gross
income each year, until the Capital invested therein is extinguished,
a sum ascertained by dividing the cost of the patent by the number
of years constituting its life or by a number representing the years of
its life remaining after the date of acquirement.

Art. 114. Bank discounts. — In cases wherein banks or other cor- 335
porations loan money by discounting bills or notes, one of two meth-
ods shall be used in determining the amount of discount that is to be ■
reported as income, namely (1) if the bank or corporation makes a
practice of crediting such discount directly to a "discount account"
Or to profit and loss, the total amount thus credited during ^e year
shall be considered income and shall be so reported, regardless of the
fact that a portion of this amount may represent discount paid iu

64 INCOME TAX.

advance and not then earned; (2) if the bank or corporation folloAvs
the practice of crediting such discount to an " unearned discount ac-
count," and later, as the discount becomes earned, debits the unearned
account and credits an " earned discount account " with the amount
so earned, the total amount credited to the " earned discount ac- ,
coimt" during the year shall be considered income and shall be so-
returned. The corporation having income of this character should
state in a memorandum attached to its return which of the two
methods was used in determining the amount of discount returned as
income.

386 Art. 115. Earnings of subsidiary company.^ — In a case wherein a hold-
ing company actually takes up each month on its books and credits
surplus or profit and loss with its proportionate share of the earnings
of the underlying companies, such holding company will be required
to include in its gross income the amounts thus taken up, regardless,
of the fact that the same may not have been actually paid to or re-
ceived by it in cash. The fact that the underlying companies credit
the holding company with the amount of earnings to which it is en-
titled on the basis of the stock it holds, together with the fact that the
holding company takes up on its books the amount thus credited^
renders it incumbent upon the holding company to return these,
amounts as income.

387 Art. 116. Sale of capital assets. — Section 10 of this title provides
that for the purpose of ascertaining the gain derived from the sale
or other disposition of property, real, personal, or mixed, acquired
prior to March 1, 1913, the fair market price or value of such prop-
erty, as of that date, shall be the basis for determining the amount of
such gain derived.

388 This provision contemplates that all such gain realized and so
ascertained, in cash or its equivalent, upon the sale or disposition
of capital assets, shall be returned as gross income. In the case of
property acquired subsequent to March 1, 1913, and later sold or
disposed of, the difference between the cost and the selling price will
be returned as income for the year in which the sale is made.

389 Sales on installment plan. — In cases wherein the property is sold on
the installment plan, title passing at the time of sale, the gain to
be returned as income for the year in which the sale was made will
be the excess of the contract price over the fair market price or
value as of March 1, 1913, if the property was acquired prior to that
date, or of the contract price over the cost, if acquired subsequent
to March 1, 1913. If tha buyer forfeits his contract and fails to
meet any of the paymsiits contracted to be made, the selling corpo-
ration ma;^ deduct from its gross income as a loss, such proportion
of &e defaulted payments as was previously returned as gro^ in-
come. (T. D, 2137.)

INCOME TAX. 65

Art. 117. Contract to sell.— In the case of a contract to sell real 390
estate^or other property on the installment plan, "title remaining in
the vendor until the property is fully paid for, the income to be
returned by the vendor will he that proportion of each installment
paymeht which the gross profit to be realized when the property is
paid for bears to the gross contract price. If, for any reason, the
vendee defaults in his installment payments and the vendor repossesses
the property, the entire amount received on installment payments,
less the proportion of profit previously returned, will be income to
the vendor, and will be so returned for the year in which the prop-
erty was repossessed.

In the case of real estate corporations, which purchase, or shall 391
have purchased, a tract of land with a view to dividing it into lots
or parcels of ground to be sold as- such, the entire value, as of March
1, 1913, or cost, if acquired subsequent to that date, shall be equit-
ahly apportioned to the several lots or parcels, to the end that any
gain derived from the sale of any such lots or parcels may be re-
turned as income for the year in which the sale was made.

Real estate subdivisions. — This rule contemplates that there will be 392
a measure of gain or loss in every lot or parcel sold, and does not
contemplate that the capital invested in the entire tract shall be
extinguished before any taxable income shall be returned. The sale
of each lot or parcel will be treated as a separate transaction and
the gain will be accounted for accordingly. If a loss results from
the sale of capital assets, the amount of the loss to be deducted will
be ascertained in a like manner as if a gain had been realized, and
will be the amount by which the selling price is less than the value,
as of March 1, 1913, or less than the cost, if acquired subsequent to
that date, as the case may be. (T. D. 2077, 2137.)

Art. 118. Sale to other corporation. — In determining the profits real- 393
ized or the loss sustained upon the sale of capital assets by ' one
corporation to another, payment therefor being made in the stocks
or bonds of the purchasing corporation, the profit or loss, as the
case may be, from such sale will be ascertained upon the basis of
the difference between the cost of such assets to the seller, in case
they were acquired subsequent to March 1, 1913, or the fair market
value as. of March 1, 1913, if acquired prior to that date, and the
fair cash value of the stock or bonds at the time the sale was made.
(T.D. 2077, 2137.)

Art. 119. Sale by subsidiary to parent corporation. — ^Where a sub- 394
sidiary or other corporation sells or transfers its assets to a parent
or other corporation, accepting in exchange therefor the stock or
bonds of the purchasing corpoiration, the question of gain or loss
resulting from this transactionwill be determined upon the basis of

33272°— 18 5

66 INCOME TAX.

the diffeieiici-. between the cost or market value as above indicated
of the assets sold and the actual value of the stock or bonds given in
exchange therefor. Any gain or loss thus ascertained as resulting
from such a transaction wiU be added to or deducted from the entire
gross income, as the case may be, of the selling corporation in the
year in which the capital assets were sold. (T.D. 2077,2137.)

395 Art. 120. Sale of merchandise on installments. — Corporations selling
furniture, musical instruments, clothing, furnishing, etc., on the
installment basis, title passing to the vendee at the time of sale, will
treat such contracts as accounts receivable and as " sales during the
year " at their face value, thus accounting for as income the differ-
ence between the cost and the sales price. If the purchaser defaults
in payment and the account becomes uncollectible and the uncollected
balance is charged o^, the amount so charged off may be deducted
as a loss.

396 In all cases wliere inventories are taken (and they must be taken
where the bu.^iness consists of buying and selling commercial com-
modities) for iiic purpose of ascertaining the gain or loss resulting
from the business of the year, the inventories must be taken in accord-
ance with instructions to be included in special regulations which wiU
be furnished upon application to the collector of internal revenue.

397 Income from contract sales. — When property or merchandise is dis-
posed of under a cwnuract of sale, payments to be made in install-
ments, title remaining in the vendor until the contract price is fully
paid, the vendor will return as income that proportion of each iu-
stallment payment, which the gross profit to be realized when the
contract is fully performed, bears to the gross contract price. If by
reason of the default in payment or for any other reason the vendor
repossesses the property he willreturn a,s income the entirg amount
of the installments up to that time received, less the proportion of
profits previously returned, and the repossessed property will be
taken into stock at its then value, that is, at cost less a reasonable
allowance for depreciation.

S;8 Art, 121. Contracting corporations. — Corporations engaged in con-
tracting operations and which have numerous uncompleted contracts,
which in some cases run for periods of several years, will be allowed
to prepare their returns so that the gross income will be arrived at
on the basis of completed work — that is, on jobs which have been
finally completed — any and all moneys received in payment for com-
pleted jobs will be returned as income for the year in which the
work was completed. If the gross income is arrived at by this
method, the deduction from gross income should be limited to the
expenditures made on account of such completed contracts.

399 Income on basis of estimates. — Or the percentage of profit from the
contract may be estimated on the basis of percentage of completion

INCOME TAX. 67

and payments made thereon, in which case the income to be returned
each year during the performance of the contract will be computed
upon the basis of the expenses incurred on such contract during
the year ; that is to say, if one-half of the estimated expeflses neces-
sary to the full perfoi'mance of the contract are incurred during one
year, one-half of the gross contract price should be retiuiied as in-
come for that year; all under or over statements of income to be
adjusted upon completion of the contract and return made accord-
ingly. (T. D. 2161.)

In cases wherein contracts are fully performed in one year, 1:00
although payment therefor may be deferred until the next, the income
resulting from the performance of the contract shall be returned for
the year in which it was actually earned and determined.

Art. 122. Interest received from tax-free bonds. — The law requires 401
the debtor corporation to deduct one normal tax from the interest
on bonds containing a tax-free covenant, and to account for same.
Interest received by a corporation or individual on bonds held,
whether they are guaranteed to be tax free or not, must be included
in the income of the corporation or individual receiving the same
and must be so accounted for in the return of annual net income.

The matter of complying with the covenant of the bond is a matter 402
to be adjusted between the debtor corporation and the bondholder.

If, however, it is clearly established by affidavit or otherwise that 403
the debtor corporation has actually withheld and paid to the proper
officers of the United. States the tax on such interest income, the
recipient having returned such interest as income, may take credit
against any tax to which subject on the basis of the return, for the
tax so paid- by the debtor corporation.

Art. 123. Farming corporations. — Corporations engaged in operating 404
plantations, ranches, stock farms, poultry farms, and lands used for
raising fruit, truck, etc., including orchards of all kinds, shall make
their returns on the basis of the products actually marketed and sold
during the year, whether such products were produced or purchased
and resold.

All deductions shall be based upon the legitimate expense incident 405
to the current year whether for the production of the present or
future years, except that in a case wherein a corporation is engaged
in producing crops which take more than a year from the time of
planting, to the process of gathering and disposal, the income re-
ported and expenses deducted should be determined upon the crop
basis.

Cost of live stock purchased for resale is an allowable deduction 408
under the item of expense, but money expended for stock for breeding

68 , INCOME TAX.

purposes is regarded as capital invested, and amounts so expended
do not constitute allowable deductions except as hereinafter stated.

407 Where stock has been purchased for any purpose, and afterwards
dies from' disease or injury or is killed by order of the authorities
of a State or the United States, and the cost thereof has not been
claimed as an item of expense in the preparation of previous returns,
the actual purchase price of such stock, less any depreciation which
may have been previously claimed, less also any insurance or indem-
nity recovered, may be deducted as a loss. The actual cost of prop-
erty destroyed by order of the authorities of a State or of the United
States, may, in like manner, be claimed as a loss; but if reimburae-
ment is made by a State or the United States, in \v'hole or in part, on
account of stock killed or property destroyed, the amount received
shall be reported as income for the year in which reimbursement is
made. In determining the cost of stock for the purpose of ascertain-
ing the deductible loss there shall be taken into account only the
purchase price, and not the cost of any feed, pasturage, or care, which
has been deducted as an expense of operations.

408 The cost of farm machinery represents a capital investment and, as
such, is not an allowable deduction as an item of expense, but the cost
of ordinary tools, of short life or insignificant cost, such as hand tools,
including shovels, rakes, etc., may be included under this item.

409 There may be claimed a reasonable allowance for depreciation on
farm buildings, farm machinery, and other physical pi'operty, in-
cluding stock purchased for breeding purposes, but no claim for de-
preciation on stock raised or purchased for resale will be allowed.
(T. D. 2123.)

410 Art. 124. Stock issued for stock of other corporation. — In a case
wherein a corporation acquires from stockholders the stock of an-
other corporation, giving in exchange therefor its own stock, it is held
that the transaction is one by which the corporation acquiring the
stock becomes the sole stockholder of the other corporation. As
a result of this transaction no income accrues to the corporation
whose stock is thus acquired. Neither will any income accrue to this
corporation if later the holding corporation should cause the assets
of the underlying company to be transferred to it for mere nominal
consideration.

411 If, however, one corporation buys- the assets of another and issues
direct to the selling company its own capital stock in payment for the
assets acquired, the transaction will be treated by the selling company
as a sale of its assets, and the question as to whether profit or loss
results from the sale will depend upon whether or not the value of
the stock taken in payment for the assets is in excess of the fair mar-

INCOME TAX. 69

ket price or value as of March 1, 1913, of the assets sold or of their
cost accordingly as they were acquired by the selling company prior
or subsequent to that date.

If the value of the stock is so in excess, the amount of such excess 412-
wUl be taxable income for the year in which the assets were sold and
must be so returned.

If the excess over value as of March 1, 1913, or over cost, as the 413
case may be, includes any surplus earned since March 1, 1913, upon
which the income tax has been paid, the excess or profits resulting
from the sale may be reduced by the amount of such tax-paid surplus.

If the purchasing corporation takes over all the assets including 414
accounts receivable, bills receivable, surplus, etc., of the selling cor-
poration and assumes its liabilities, the amount so assumed will be
considered a part of the purchase price, and to the extent that the en-
tire purchase price exceeds the cost or value, as of March 1, 1913, as
•the case may be of the assets disposed, income will accrue to the
selling company;

Art. 125. Operating corporation controlled by stock ownership. — A rail- 415
road company operating leased or purchased lines as an integral
part of its line or s^fetem, and keeping no separate books of account
as to stich leased or purchaseid line, and the income from the operation
of which can not be segregated, shall include in its income all re-
ceipts derived therefrom, and if bonded or other indebtedness of the
leased or purchased liue has been assumed by the operating com-
pany, it may deduct from its gross income the interest paid on such
indebtedness, provided the interest so paid plus the interest paid on
its own indebtedness is not in excess of the limit fixed by the law. In
this event the leased or purchased line so long as it has a corporate
existence will make return of annual net income setting out that on
its own account it has neither income nor expenses, and that both are
taken up in the return of the operating company, naming it.

Lessor must make return. — ^If the leased or purchased line keeps 416
separate books of account, or the income from its operations is, or can
be segregated, or if the lessee or operating company pays it a cer-
tain rental, or in lieu of rental pays a certain per cent of dividends
on its stock, interest on its bonds, taxes, etc., it (the lessor) will re-
turn the same as its income and will be subject to tax accordingly,
and the lessee or operating company will make its return as though it
were in no way related to the leased line.

Subsidiary to make return. — ^The rule hereinbefore set out is not 417
intended to apply to those cases wherein one corporation operating
for itself is controlled by another through the ownership of a ma-
jority or all of its stock. In this case the controlling corporation is,
for the purpose of this title, merely a stockholder, and the subsidiary
company will be required to make a separate and distinct return,

70 INCOME TAX.

accounting for all the income received by it during each taxable year
(T. D. 2442) and the holding company will return as income any
dividends or earnings received from the operating company.

DEDUCTIONS.

418 Art. 126. " Paid " or " actually paid."—" Paid " or " actually paid,"
within the meaning of this title, does not necessarily contemplate
that there shall be an actual disbursement in cash or its equivalent.
If the amount involved represents an actual expense or element of
cost in the production of the income of the year, it will be properly
deductible even though not actually disbursed in cash, provided it ia
so entered upon the books of the company as to constitute a liability
against its assets, and provided further that the income is also re-
turned upon an accrued basis.

419 If in the course of its business, a corporation credits the accounts
of individuals, firms, or corporations with the amount of any ex-
penses, interest, rentals, wages, etc., due them, thereby making them
subject to the personal drawings of such creditors, or if expenses
actually incurred are vouchered in definite amounts, the amounts
so credited or vouchered may be treated as paid, and if the amounts
so credited or vouchered are expenses incurred concurrently with
and in the production of the income of the year, they may be allow-
ably deducted therefrom.

420 This ruling must not be construed to allow as a deduction any
.accrued charges which if paid in cash or otherwise would not be
deductible.

421 Art. 127. Approved accounting practices. — Pursuant to the foregoing
provision, corporations keeping their accounts in strict accord with
the methods prescribed by municipal. State, or Federal authorities,
or in accord with approved standard accounting practices con-
sistently followed from year to year, will be permitted to make their
returns of annual net income on the basis of the accounts so kept,
provided such systems of accounting clearly and correctly reflect the
net income of each year.

422 Charged against current earnings.— All expenses, including interest,
taxes, and other necessary charges, incidental and necessary to the
creation or production of the gross income or properly chargeable
against the same, being deductible from the gross income, whether
paid in cash or entered on the books as a liability, can not, if un-
paid, be carried forward to be deducted from the gross income of a
subsequent year.

23 Each year's return complete.— Each year's return, both as to income
and deductions therefrom, must be complete within itself. Charges,
of whatever character, against income can not be cumulative. They

INCOME TAX. 71

must be deducted from the income of the year in which incurred or
not at all. The expenses, liabilities, or defiicit of one year can not be
used to reduce the income of a subsequent year.

The deductions must in all cases be such as are authorized and 424
v/ithin the limits fixed by law.

Art. 128. Previous year's charges not deductible. — A corporation hav- 425
ing the right under this rule to deduct all authorized allowances,
whether paid in cash or set up as a liability, it follows that if it
does not within any year pay or accrue certain of its expenses, in-
terest, taxes, or other charges, and makes no deduction therefor, it
can not deduct from the incoijie of the next or any subsequent year
any amounts then paid in liquidation of the previous year's liabilities.

Amended returns. — If, however, a corporation discovers or detects 426
expenses or liabilities which were due and payable during a pre-
ceding year, it will be permissible for it to make an amended return
for the year to which such expense or liability applies, include such
expense in the deductions of that year, and file a claim for refund
for any taxes overpaid by reason of the failure to deduct such ex-
pense or liability in the original return of that year.

Any system of accounting which is not consistent with the purpose 427
and intent of the rules set out in this title, and with the general rules
set out in these regulations for the ascertainment of net income, will
not be accepted as a correct basis for making returns.

EXPENSES.

Art. 129. When deductible. — Expenses of operation and mainte- 428
nance shall include all expenditures for material, labor, fuel, and
other items entering into the cost of the goods sold or inventoried at
the end of the year, provided such expenditures have not been con-
sidered in determining the cost of" goods or materials or purchases
thereof during the year, when the income derived from operations is
ascertained through inventory, and all other disbursements necessary
to the operation of the business, except such as are required by the
act to be segregated and stated separately in the return.

Expenditures which are taken into account in determining the 429
cost of products, finished or unfinished, are not to be again deducted
as expenses of operation and maintenance.

Art. 130. Cost of material. — In ascertaining expenses proper to be 430
included in the deductions to be made under the item of " Expenses,"
corporations carrying materials and supplies on hand should include
in such expense the charges for materials and supplies only to the
amount, that the same are actually consumed and used in operation
and maintenance during the year for which the return is made,
provided that, the cost of such material and sup jplies has not been

72 IKCOME TAX.

taken into account in determining the net income for any previous
year.

431 If a corporation carries materials or supplies on hand for which
no record cfi consumptiqn is kept or of which physical inventories
at the beginning and end of the year are not taken, it will be per-
missible for the corporation to include in its expenses and deduct
from gross income the total cost of such supplies and materials as
were purchased during the year for which the return is m.ade.

432 Art. 131. Kepairs.— The cost of incidental repairs which neither add
to the value of the property nor appreciably prolong its life, but
keep it in an ordinarily efficient operating condition, may be de-
ducted as expense, provided that the plant or property account is
not increased by the amount of such expenditures. Such repairs,
to. the extent that they arrest deterioration, should have the effect
to reduce the depreciation charge otherwise deductible.

433 Art. 132. Additions and betterments. — ^Amounts expended in addi-
tions and betterments or' for furniture and fixtures which con-
stitute an increase in -capital investment and add to the value of the
assets are not a proper deduction, but such expenditures when cap-
italized may be extinguished through annual depreciation deductions,
which latter deductions will be computed upon the basis of the cost
and probable life of the property.

43'^ Art. 133. Spending money. — So-called " spending or treating money "
actually advanced by corporations to their traveling salesmen to be
nsed by them as a part of the expense incident to selling the product '
of such corporations, is an allowable deduction in a return of income
by such corporation. The deduction of such expenditures is con-
ditioned upon a satisfactory showing that all the allowance claimed
as a deduction was actually expended for and was an ordinary and
usual expense incurred in selling the product or merchandise of the
corporation. (T. D. 2090.)

ii35 Art. 134. Donations deductible, when. — Donations made by a cor-
poration for purposes connected with the operation of the property,
when limited to charitable institutions, hospitals, or educational
institutions, conducted for the benefit of its employees or their de-
pendents, shall be a proper deduction as ordinary and necessary
expenses. Such deduction should, however, be reduced by any
amount repaid to the corporation by the employees.

136 Donations which legitimately represent a consideration for a
benefit flowing directly to the corporation as an incident of its busi-
ness are allowable deductions from gross income in ascertaining net
income subject to the income tax ; for example, a street railway cor-
poration donates a sum of money to an organization intending to
hold a convention in the city in which it operates, with the expecta-
tion that the holding of such convention will augment its income

INCOME TAX, V3

through a greater number of people using the cars. In such case
the donations would be an allowable deduction, the deduction to be
reduced by any portion of the donation which may be returned to
the corporation.

Art. 135. Donations not deductible.— Donations made to employees 437
and others, and which do not hare in them the element of compen-
sation, are considered gratuities and are not allowable deductions
from gross income as expenses of operation or maintenance or under
any other item. (T. D. 2090.)

Art. 136. Pensions. — ^Amounts' paid for pensions to retired cm- 438
ployees, or to their families or others dependent upon them, or on
account of injuries received by employees, or lump-sum amounts
paid as compensation for injuries, are proper deductions as "ordi-
nary and necessary expenses." Such deduction shall be limited to
the amount not compensated for by insurance or otherwise.

No deduction shall be made for contributions to a pension fund 439
the resources of which are held by the corporation, the amount de-
ductible in such case being the amount actually paid to the employee;
. Art. 137. Salary paid after death of einployee. — When the amount of 440
the salary of an officer or employee is paid for a limited period after
his death to his widow or heirs, in recognition of the services ren-
dered by the individual, no services being rendered by the widow or
heirs, such payment is not " ordinary and necessary " expense of
transacting business and does not constitute an allowable deduction.
■ Art. 138. Bonuses or additional compensation. — Special payments, 441
sometimes denominated as gifts or bonuses to employees of corpora-
tions, will constitute allowable deductions from gross income in
ascertaining net income for the purpose of the income tax, when such
payments are made in good faith and as additional compensation for
the services actually rendered by the employees. If such payments,
when added to the stipulated salaries, do not exceed a reasonable
compensation for the services rendered, they will be regarded as a
part of the wage or hire of the employee, and therefore an ordinary
and necessary expense of operation and maintenance, and as such
deductible from gross income.

Special payments made to officers or employees who are stock- 442
holders, in the guise of additional salaries or compensation, the
amount of which is based upon or bears a close relationship to the
stockholdings of such officers or employees or the capital invested
by them in the business of the company; will be regarded as a
special distribution of profits, or compensation for the capital in-
ycsted, and not payment for services rendered. Payments under
such latter conditions being in tlie nature of dividends, will not be
deductible from gross income.

74 INCOME TAX.

143 Siilaries of officers or employees who are stockholders will be sub-
ject to careful analysis, and if they are found to be out of proportion
to the volume of business transacted, or excessive when compared
with the salaries of like officers or employees of other corporations
doirig a similar kind or volume of business, the amount so paid in
excess of reasonable compensation for the services will not be de-
ductible from gross income, but will be treated as a distribution of
profits.

444 Art. 139. Compensation paid in stock. — Compensation paid an em-
ployee in capital stock of the corporation may be deducted as an
expense if so charged on books at the actual value of such stock, and
the recipient of such stock, if he be a taxable person, will return
such stock at the same value as income.

445 Art. 140. Permanent improvements under lease. — The cost of erect-
ing permanent buildings, or of making permanent improvements on
ground leased by a company, is held to be an additional rental and is
therefore a proper deduction from gross income, provided such
buildings and improvements, under the terms of the lease, revert to
the owner of the ground at the expiration of the lease. In such case,
however, the cost will be prorated according to the number of years
constituting the term of the lease and the annual deduction will be
an aliquot part of such cost. (As to income to lessor, see paragraph
50, page 11, these regulations.)

446 No depreciation. — The cost of the buildings being a rental charge
and deductible on the prorated basis, the lessee corporation will not
be permitted to deduct from gross income any depreciation with
respect to such buildings, but the cost of incidental repairs necessary
to keep them in an efficient condition for the purposes of their use,
may be deducted as an expense of operation and maintenance. (T. D.
2137.) •

447 If, however, the life of the improvement is less than the life of the
lease, the depreciation may be taken by the lessee, based upon the
cost and life of the improvement.

448 Art. 141. Eedemption of trading stamps.— Corporations, mercantile
or otherwise, which issue trading stamps, coupons, etc., for the pur-
pose of increasing tlieir business, which stamps or coupons are re-
deemable in m^erchandise, may allowably deduct from gross income
as a business expense the amount which such corporations actually
expend for such stamps or coupons, and also the actual cost to the
corporations of the merchandise given in redeeming the same.

449 This rule contemplates that a reserve set up as a liability equal
to the redemption value of the stamps or coupons issued is not, as
such, an allowable deduction, the deduction being limited to the cost
of the stamps or coupons and the merchandise with which they are
redeemed.

INCOME TAX. 75

Art. 143, Earnings of public utility paid to city, etc. — In case of a 450
public utility constructed, operated, or maintained by a corporation
under contract with any city, State, Territory, or the District of
Columbia, with an agreement that a portion of the net earnings of
such public utility corporation shall be paid to the city. State, Ter-
ritory, or the District of Columbia, the amount so paid may be de-
ducted by the public utility company as a necessary expense of trans-
acting business. (T. D. 2090.)

Art. 143. Lobbying expenses. — Sums of money expended for lobby- 451
ing purposes, the promotion or defeat of legislation, the exploitation
of propaganda, and contributions for campaigii expenses are held
not to be an ordinary and necessary expense in the operation and
maintenance of the business of a corporation, and are therefore not
deductible from gross income in arriving at the net income upon
■which the income tax is computed. (T. D. 2137.)

Art. 144. Reserves for insurance. — Funds set- aside by a corporation 452
for insuring its own property are not a proper deduction, but if such
funds are set aside, or a reserve therefor is set up, any loss actually
sustained and charged to such funds or reserves may be deducted.

Art. 145. Expense incurred in sale of capital stock. — Any and all ex- 453
penses incidental to or connected with the selling of the capital
stock (common or preferred) of a corporation for the purpose of
raising capital to be by it invested in property or employed in the
business for which the corporation is organized are not an " expense of
operation and maintenance " within the meaning of this title, and such
expense is not an allowable deduction from the gross income, for the
reason that such an expense is incurred in a capital transaction ; that
is, the raising of capital to be invested or employed in the business.

Such expense, like the discount at which the shares of stock may 454
be sold, has the effect only to reduce the available capital of the cor-
poration and can not be used to reduce the income from operations ;
that is to say, any expense incident to the bringing of capital into
the company, whether it be a new or a going concern, can not be
recouped out of or charged against the operating income. It is a
capital loss or expense properly chargeable against the proceeds of
the sale of the stock and reduces the capital rather than the earnings
of the company.

Art. 146. Depositors' guaranty fund. — Banking corporations which, 455
pursuant to the laws of the States in which they are doing business,
are required to set apart, keep, and maintain in their banks the
amount levied and assessed against them by the State authorities
as a " Depositors' guaranty fund," may deduct from their gross in-,
come in their returns of annual' net income the amount so set apa,rt
each year to this fund, provided that such fund, when set aside and
carried to the cre'dit of the State banking board or otlier duly au-

76 INCOME TAS.

456 thorized State officer, ceases to be an asset of the bank, but may be
withdrawn in whole or in part, upon demand by such board or State
ofScer to meet the needs of these officers, as required by State laws,
in reimbursing depositors in insolvent banks, and provided further
that no portion of the amount thus set aside and credited is return-
able, under the existing laws of the State, to the assets of the banking
corporation.

457 If, however, such amoimt is simply set up on the books of the bank
as a reserve to meet a contingent liability, and remains an asset of
the bank, it will not be deductible except as it is actually paid out as
required by law and upon demand of the proper State officers. (T.
D. 2152.)

LOSSES.

458 Art. 147. When deductible. — ^The deduction for losses must repre-
sent losses not compensated for by insurance or otherwise and which
were charged off and actually sustained within the year as evidenced
by closed and completed transactions.

In the case of the sale of assets — ^real, personal, or mixed— the loss
will be the difference between the cost thereof, or the value as of
March 1, 1913, if acquired before that date, and the price at whidi
disposed of. Wlien the loss is claimed through the destruction of
property by fire, flood, or other casualty the amount deductible will
be the difference between the value as of March 1, 1913, or the cost
of the property and the salvage value thereof, including in the latter
\alue the amount, if any, that has been or should have been set aside
and deducted in the current or previous years from gross income
on account of depreciation and which has not been paid out in making
good the depreciation sustained.
469 Art. 148. Shrinkage in securities. — A corporation possessing securi-
ties, such as stocks and bonds, can not allowably deduct from gross
income any amount claimed as a loss on account of the shrinkage
in value of such securities through fluctuations of the market or
otherwise; the only loss to be allowed in such cases is that actually
suffered when the securities mature or are disposed of.

460 In the case of banks or other corporations which are subject to
supervision by State or Federal authorities, and which, in obedience
to the orders of such supervisory officers, charge off as losses, amounts
representing an alleged shrinkage in the value of property, real,
personal, or mixed, the amounts so charged off do not constitute al-
lowable deductions. Deductible losses are those only which are de-

• termined upon the basis of a closed or completed transaction. (T.
D. 2005, 2130, 2152.) The foregoing applies only to owners and in-
vestors and not dealers in securities, as to which see T. D, 2609.

461 Art. 149. Discount on bonds issued prior to.l909.-7-Discount on bonds
issued and sold prior to the year 1909, if such discount was then

INCOME TAX. 77

charged against surplus or against the income of the year In which
the bonds were, sold, is held not to be deductible from the income of
subsequent years, for the reason that the charging off prior to Janu-
ary 1, 1909, of the entire amount of the discount constitutes a closed
transaction, and such transaction can not be reopened for the purpose
of reducing the taxable income of a corporation for subsequent years
by deducting therefrom an aliquot part of the discount. (C. & A.
E. R. V. U. S., Court of Claims).

Art. 150. Discount and expenses to be amortized. — If, however, the 462
bonds were sold subsequent to January 1, 1909, at a discount, and
the amount of the discount was then charged off on the books, either
against earnings or surplus, but not deducted in the corporation's
return of net income, such discount as was not then deducted, may
be spread over the life of the bonds, and an aliquot part of the
discount m^ay be deducted from the gross income of each year until
the bonds mature or are redeemed.

In cases wherein a corporation sells its bonds at a discount plus a 463
commission for selling, the amount of such discount and commis-
sion, together with other expenses incidental to issuing the bonds,
<!onstitutes a loss, the aggregate amount of which loss will, for the
purpose of an income tax return, be prorated over the life of the
bonds sold, and the amount thus apportioned to each year will be
deductible from the gross income of each such year until the bonds
shall have been redeemed.

If a corporation having sold its bonds at a discount, the discount 464
having been deducted from gross income, later repurchases or re-
deems the bonds at a price less than par, the difference between the
price at which they are redeemed and their par value will be returned
as income. If bonds are sold at a premium, the premium must be
returned as income.

Art. 151. Bad debts.— Losses which may be properly deducted from 435
gross,income on account of bad debts or doubtful accounts arc those
losses which have been definitely ascertained to have occurred and
which were charged off during the year for which the return is
made. It is not essential that the bad debt or accomat shall bo proved
worthless by legal proceedings before the deduction may be allowed,
but the corporation must not only be satisfied that the debt or account
is worthless, but must be able to satisfy the Commissioner or Col-
lector of Internal Eevenue that the accounts charged off were defi-
nitely determined at the time to be worthless and that they had not
been recognized as worthless or without value prior to the beginning
of the year for which the retui'n is made.

loss must be deinite. — In the absence of legal proceedings to deter- 466
mine the collectibility of a debt or account, the question of whether
or not it is an asset without value will depend largely upon the

78 IKCOME TAX.

judgment of the creditor. The mere writing down of the value of an
account does not constitute such a loss as may be allowably deducted.
TliO deduction will be permissible only when the debt or account is
written out of the assets of the corporation.

467 Art. 152. Loss due to retirement of bonds. — In a case wherein a cor-
poration, under the terms of its indenture, securing an issue of
bonds is required annually or at certain ;specified periods to pur-
chase and retire a certain number of its bonds and in doing so pays
more than par for the bonds, the loss sustained is an allowable de-
duction from gross income for the year in which such purchase is
made, under the following conditions :

468 First. If the bonds were sold at par, then the loss is the diflfer-
ence between par and the price at which they were repurchased for
retirement.

469 Second. If the bonds were sold at a premium and such premium
was accounted for as income for the year in which issued, then the
difference between par and the repurchase price may be deducted as
loss, but if the premiums at which the bonds were issued had not
been carried hito the income account then the loss to be claimed
should be the difference between the price at which the bonds were
sold and the price at which they were repurchased.

470 Third. If the bonds were sold at a discount and the discount: was
charged against the earnings of the year in which issued, the dif-
ference between par and the repurchase price may be deducted as a
loss, but if the discount on the bonds was prorated over the life 'of
ihe bonds and the annual proportion charged against the yearly
income, the amount to be charged off as a loss for the year in which
the bonds are repurchased for retirement should be the difference -
between the price at which the bonds were sold and the repurchase
price minus an allowance for the sum that had been charged off
annually on account of the prorated discount on such bonds. (T.'D.
2137.)

471 . Art. 153. Irrigation bonds. — District irrigation bonds generally are
a lien upon the real estate affected by the irrigation project, and
until a corporation holding such bonds has taken the necessary
action to protect its interests and enforce the collection of the bonds
the corporation will not be allowed to deduct from gross income, as
a loss, the face value or any estimated amount supposed to a'epresente
a. loss or shrinkage in the value of such bonds. Any estimated
shrinkage in the value of bonds or other securities does not constitute
a loss within the meaning of this title. So long as the value of a
security is uncertain or unknown a loss can not be definitely ascer-
tained and is therefore not deductible. (T. D. 2005, 2130, 2152.)

472 Art. 154. Beath of live stock. — A corporation engaged in raising
and selling sheep, cattle, or other live stock can not deduct, from'

INCOME TAX. 79

gross income any amounts .claimed as a loss on account of the death
of such live stock through exposure or otherwise, unless and to the
extent that such stock was specifically paid for in cash or its equiva-
lent. If the stock is raised and fed upon the farm or range, the
cost of feeding and raising the stock will be included as operating
expenses of the corporation, and no loss of capital is sustained when
the live stock perishes. If ^ however, the live stock was purchased
and the cost thereof was not charged into expenses and as such de-
ducted from gross income, the deductible loss will be the actual pur-
chase price of the stock which perished, less any depreciation which
had been previously charged off and deducted with respect to such
purchased live stock. (T. D. 2153.)

Art. 155. Voluntary removal of 'buildings. — ^Loss due to the voluntary 473
removal or demolition of old buildings, the scrapping of old ma-
chinery, equipment, etc., incident to renewals and replacements will
be deductible from gross income, in an amount representing the
'difference between the cost of such property demolished or scrappetl
and an amount measuring a reasonable allowance for the deprecia-
tion which the property had undergone prior to its demolition or
scrapping; that is to say, the deductible loss is only so much of t'nQ
original cost, less salvage, as would have remained unextinguished
had a reasonable allowance been charged off for depreciation daring
each year prior to its destruction.

Art. 156. Erection of new buildings. — When a corporation buys rea] 474
estate upon which is located a building or buildings, which it pro-
ceeds to raze, with a view to erecting thereon another building or
buildings, it will be held that the corporation has sustained no de-
ductible loss by reason of the demolition of the old building or build-
ings. In such case it will be considered that the value of the real
estate, exclusive of old improvements, is equal to the purchase price
of the land and buildings.

Art. 157. Sale of patents. — A corporation disposing of patents by 475
sale should determine the profit or loss arising therefrom by comput-
ing the difference between the selling price and the value as of
March 1, 1913, if acquired prior to that date, or between the selling
price and the cost, if acquired subsequent to that date. The profit or
loss thus ascertained should be increased or decreased, as the case may
be by the amounts deducted on account of depreciation of such
patents since March 1, 1913, or since the date of purchase if acquired
subsequent to that date.

Art. 158. losses^on judgments. — Any amount paid pursuant to judg- 476
ment or otherwise on account of damages is deductible from gross
income to the extent of,. and when the amount is actually paid, less
any amount of such damages as may have been compensated for by
insurance.

80 INCOME TAX.

DEPRECIATION.

477 Art. 159. Depreciation deductible. — Section 12, item " second," au-
thorizes corporations to deduct from the gross amount of their
income received within the year all losses actually sustained and
charged off within the year, including a reasonable allowance for
the exhaustion, wear and tear of property arising out of its use or
employment in the business or trade.

478 Depreciation as here used must be differentiated from depletion,
obsolescence, and other losses elsewhere provided for in these regu-
lations.

479 The deduction for depreciation should be the amount of the loss
occurring during the year to which the return relates, estimated
on the cost of the physical property with respect to which such
deduction is claimed, which loss uesults from wear and tear due to
the use to which the property is put and which loss has not been
made good through expenditures for renewals, replacements, and
repairs, deducted under the heading of expense for maintenance
and operation.

480 Must be charged off. — Within the purview of this item depreciation,
to an amount measuring the decline in value due to exhaustion,
wear and tear of property arising out of its use, is a loss. This loss,!'
in order to constitute an allowable deduction from gross income^
must be charged off. The particular manner in which the amount
shall be charged off is not material, except that the amount measur-
ing a reasonable allowance for depreciation must be either deducted
directly from the book value of the assets or credited to a depreciation
reserve account, and as such shall be reflected in the annual balance
sheet. (See sec. 1001, act of Oct. 3, 1917.)

481 Art. 160. Loss on inventory by obsolescence or damage. — No deduc-
tions from the inventory value of merchandise or material will be
allowed except in cases in which the inventory includes goods or
materials which by reason of obsolescence or damage are unsalable.
When such deduction is claimed the facts connected therewith, in-
cluding a statement of the cost of the goods, the value at Avhich they
were inventoried, and their present condition, must be filed with the
return.

482 Art. 161. Diversion of fund. — ^If a corporation at the end of the year
finds it has a certain net income, and, without making any provision
for depreciation, distributes such net income among its stockholders
as dividends, it will be estopped from claiming in its returns of an-
nual net income for such year any deduction on account of deprecia*-
tion unless it is shown conclusively (hat the property account has
been reduced by the amount of depreciation claimed, or unless such

.INCOME TAX. 81

amomit has been credited to a depreciation reseTvc account, and such
amount was in fact a reasonable allowance.

The depreciation allowance authorized by section 12 is intended to 483
provide a fund out of which the loss due to use, wear, and tear may
be made good, and the fund thus created can not be diverted to the
payment of dividends; that is to say, a deduction made under the-
guise of depreciation can not measure a loss and at the .same time be
used in the payment of dividends.

The fact that no reserve was made for depreciation indicates that 484
there is no loss on this account to be provided for.

Art. 162. Kate for computing. — No definite rate has been fixed by 485
which an allowable deduction on account of depreciation in the value
of any class of property subject to wear and tear is to be computed,
but it is contemplated that this allowance shall be computed upon
the basis of the cost of the property and the probable number of
years constituting its life. The deduction to be allowed relates solely
to loss due to use, wear and tear, and the matter of obsolescence is
not relevant, inasmuch as when the property becomes obsolete a de-
duction for the loss sustained thereby, representing the diffei-ence
■l^etwen the cost and the amount of depreciation previously charged

• off or which should have been charged off in prior years, will be
allowed. (See arts. 178 and 179.)

Eate based upon life. — ^In the T!ase of buildings the deduction on 488
account of depreciation shall not include any allowance for an esti-

I mated loss due to lessening of rental value, nor shall the computation
of the .deduction be influenced by the changed environment after a
period of years, nor by its lack of adaptability to the use originally
intended nor to any other outside influence affecting its value, but an
allowable depreciation shall be determined solely upon the estimated
life of such buildings after making due allowance for ordinary re-
pairs, the cost of which may be deducted as expenses for maintenance

I and. operation. '

- Assets not subject to wear and tear. — Assets of any character Ivhat- 487

; ever which are not affected by use, wear and tear (except patents,
copyrights, etc.) are not subject to the depreciation allowance au-

' thorized by this act. Eeal estate as such, and as distinct from the im-
provements thereon, is not reduced in value by reason of wear and
tear, and it therefore follows that the "allowance" contemplated
as an offset to depreciation in the case of real estate corporations does
not Spply to the ground, but is intended to measure the decline, by
jV^ason of wear and tear, in the value of the improvements. (T. D.

fSi52.) ,_,; ' ;■_■;

33272°— 18 — 77^

82 INCOME TAX.

4S8 Art. 163. Vahie to be estimated, when.— In determining the cost of
the real estate upon which depreciable property is located it fre-
quently occurs that no segregation is made of the cost of buildings
as separate and distinct from the cost of the ground upon which such
buildings stand. In such cases where the actual cost of the buildings
or improvements at the time they were taken over by the corporation
can not be definitely determined, it will be sufficient for the pur-
pose of determining the rate of depreciation to be used in computing
the amount which will be deductible from gross income to estimate
the actual value at the time acquired of buildings or improvements
if acquired after March 1, 1913, or the fair market price or value as
of that date if the property was acquired prior to March 1, 1913, the
value in either case to be reduced by the amount of depreciation previ-
ously sustained. (T. D. 2137, 2152.)

489 Art. 164. Use of depreciation reserve. — Depreciation set up on the
books and deducted from gross income can not be used for any pur-
poses other than in making good the loss sustained by reason of the
wear and tear of the property with respect to v/hich it is claimed. '

490 If, however, an investment is made in extensions, additions' or
betterments of the company's own property, representing a part or
the whole of the credit balance of the depreciation reserve account,
such investment will not be considered a misuse or diversion of the
depreciation deduction otherwise allowable.

491 Art. 165. Depreciation in excess of cost. — If it develops that by rea-
son of underestimating the life of the property or by overestimating
the rate of deterioration an amount in excess of the yearly deprecia-
tion has been taken, the rate applicable to future years should at once
be reduced and the balance of the cost of the property not provided
for through a depreciation reserve should be spread over the esti-
mated remaining life of the property.

492 Art. 166.' Sinking-fund reserve. — When a corporation sets aside a
part of its earnings for the purpose' of creating a sinking fund with
which to retire its bonded or other indebtedness, the annual additions
to such funds are not allowable deductions from gross income as or
in lieu of depreciation or on any other account. The earnings thiis
set aside are an asset of the corporation and any accretion thereto
must be accounted for as income. (T. D. 2161.)

493 This ruling will not, however, forbid the deduction from gross ^
income of a reasonable allowance for depletion of natural deposits'
even through the amount so deducted be used in whole or in part
in the payment of its bonded or other indebtedness.

494 Art. 167. Good will.—" Good will" represents the value attached' to
a business over and above the value of the physical property, and is
such an intangible asset that it is not subject to wear and tear and.

INCOME TAX. 83

no claim for depreciation in connection therewith can be allo-sred.
Any loss resulting from or on account of an investment in "good
will " can be determined only when the property or business to which
the good will attaches is sold or disposed of, in which case the profit
or loss will be determined upon the basis of the value of the assets
including good will if acquired prior to March 1, 1913, or their cost
if acquired subsequent to that date.

Art. 168. No deduction for depreciation of good will, trade-marks, and 495
trade brands. — No deduction will be allowed for the depreciation of
good will, trade-marks, and trade brands. If such assets shall have
been .purchased at a determined price and shall be later sold at a
price less than such cost, or less than their determined fair market
value as of March 1, 1913, if acquired prior to that date, the amount
by- which the selling price is less than the cost or value, as the ease
may be, will be a loss deductible from the gross income of the year in
which such assets were sold.

Art. 169. Merchandise. — Depreciation computed on total invoice cost 496
of merchandise in stock is not an allowable deduction, except that
if any .portion of the merchandise in stock is unsalable by reason of
obsolescence or damage, a depreciation deduction not in excess of the
decline in value, during the taxable year will be allowed.

;/ DEPLETION.

oil AND GAS PEOPEETIES.

ii

Art. 170. Sections 5 and 12 of the act of September 8, 1916, 33497
amended by the act of October 3, 1917, authorize individuals and cor-
porations owning and operating gas or oil properties, to deduct from
gross income —

"A reasonable allowance * * * for actual reduction in flow and produc- 493
tion, * * * provided that when the allowance authorized * * * shall
equal the capital originally invested, or in case of purchase made prior to
March 1, 1913, the fair market value as of that date, no further allowance shall
be made."

I The essence of this provision of law is that the owner or operator 499

of this character of properties shall secure through an aggregate of

annual depletion deductions, the return of the amount^ of capital

actually invested, or an amount not in excess of the fair market value

as of March 1,.1913, of the properties owned prior to that date.

. For the purpose of determining the amount of capital to be re- gOQ

turned through annual deductions, operators may be divided into two

classes, (a) operators who own the fee, and (Z>) operators who oifn

a lease or leases.

f In the case of the operating fee OAvner, the amount returnable 501

through depletion deductions is the fair markft, value of the property

84 IITCOME TAX.

(exclusive of the cost of physical property) as of March 1, 1913,
if acquired prior to that date, or the actual cost of the property if ac-
quired subsequent to that date, plus, in either case, the cost of de-
velopment (other than the cost of physical property incident to
such development) up to the point at which, the income from the de-
veloped territory equals or exceeds the deductible expenses.

502 In the case of a lessee, the capital thus to be returned is the amount
paid in cash or its equivalent as a bonus or otherwise by the lessee
for the lease, plus also all expenses incurred in developing the prop-
erty (exclusive of physical property) prior to the receipt of income
therefrom sufficient to meet all deductible expenses, after which time
as to both owner and lessee, such incidental expenses as are paid
for wages, fuel, repairs, hauling, etc., in connection with the drilling
of wells and further development of the property, may, at the optioDfl
of the operator, be deducted as an operating expense or charged to
capital account.

603 If, in exercising this option, the individual or corporation charges
the expense of drilling wells or further development to capital
account, the same, in so far as such expense is represented by physicdl
property, may be taken into account in determining a reasonable i
allowance for depreciation during each year until the property
account thus augmented has been extinguished through annual de-
preciation deductions, after which no further deduction on this
account will be allowed. In the case of a going or producing busi-
ness, the cost of drilling nonproductive wells may be deducted from
gross income as an operating expense.

ESTIMATE 01' PROBABLE EESOTTBCES.

504 In the case of either an owner or lessee it will be required that an
estimate, subject to the approval of the Commissioner of Internal'
Revenue, shall be made of the probable quantity of oil or gas con-
tained in or to be recovered from the territory with respect to which
the investment is made. The invested capital (value as of Mar, 1,
1913, or cost, if acquired subsequent to that date, plus the cost of
development, other than cost of physical property, up to the point of
expense-paying production, in the case of an owner, and the amount
actually paid for the lease plus cost of development, other than cost
of physical property, up to the same point, in the case of a lessee)
will be divided by the number of units of oil or gas so estimated to
be contained in or to be recovered from the territory, and the quotient
will be the per unit cost or amount of capital invested in each unit
recoverable. This quotient, or per unit cost, when multiplied by 'the
number of units removed from the territory during any one year,

INCOME TAX. 85

■will determine the amount which may be allowably deducted from
the gross income of that year on account of depletion of assets or as a
return of invested capital until the total of such deductions shall
equal the capital invested.

Every individual or corporation entitled to a deduction on account 505
of the depletion of the property under operation or for a return of
the capital invested with respect to the same shall keep an accurate
ledger account, in which, in the case of fee owner, shall be charged
the fair market value as of March 1, 1913, or the cost, if acquired
subsequent to that date, of the oil or gas property, plus cost of de-
velopment as hereinbefore defined, or, in the case of a lessee, the
amount actually originally invested in the lease and its development.
This account shall be credited with the amount claimed and allowed
each year as a deduction on account of depletion or as a return of
capital, to the end that when the credits to the account equal the
debits no further deduction on either account, with respect to this
property and the capital invested therein, will be allowed. Or, in
lieu of a I direct credit to property account, the amount so claimed
:and allowed as a deduction may be credited to a depletion reserve
account.,

WHEKE KESOTJECES ARE UNCERTAIN.

If for any reason the quantity of oil or gas in the property can 50*3
not be determined with any degree of certainty, the depletion deduc-
tion will be computed in accordance with the rule set out in Treasury
Decision 2447, except that lessees may compute their deduction for
return of capital (cost of lease and development) in the same manner
as owners in fee; that is, they may extinguish such capital on the
basis of the reduction in flow and production as compared with the
preceding year, or, in tlift case of leasehold properties brought in or
developed during the year, the depletion deduction may be computed
'"on the basis of the decline in settled flow and production, as evi-
denced by tests and gauges made at the end of the year as compared
withsimilar tests and gauges made at the time the settled flow was
•determined.

For the purpose of computing the depletion the territory compre- 507
hended in a given lease will be considered the unit with respect to
which the depletion deduction may be claimed and allowed.

If the operator is the owner of the fee the value determined and 50P
set up as of March 1, 1913, or the cost of the property if acquired
subsequent to that date, or, if the operator is a lessee, the amount
actually paid for the lease, plus, in the case of both owner and lessee,
the cost of subsequent development, exclusive of physical property,
if such cost is capitalized, will be the basis for determining the do-

86 INCOME TAX.

pletion deduction or the deduction for return of capital for all sub-
sequent years during the continuance of the ownership under which
t,he value was fixed or by which the investment was made, and dur-
ing such ownership there can be no revaluation for the purpose of
this deduction if it should be found that the quantity of oil or gas
in the property was underestimated at the time the value was fixed
or the property was acquired, or at the time the lease contract \fas
entered into or purchased.
609 This rule will not, however, be so construed as to forbid an oper-
ator from redistributing the invested capital over the estimated
number of units remaining in the territory under operation if a
subsequent increase of in\ested capital should render this necessary
in order to determine the amount of such capital applicable to each
unit, pi'ovided that when such redistribution is made the total capi,
tal invested will be reduced by the amount previouslj'^ charged off
and ileducted on account of depletion or as a return of capital.

ADDITIONAL DEPRECIATION FOR MACHINERY, ETC.

510 Both owners and lessees operating oil or gas properties will, ih
addition to and sepai'ate from' the deduction allowable for the de-
pletion or return of capital as hereinbefore provided for, be per-
mitted to deduct a I'easonable allowance for depreciation of physical
property, such as machinery, tools, equipment, pipes, etc., the amount
deductible upon this account to be such an amount, based upon its
capitalized value (cost) equitably distributed over its useful life,
as will bring it to its true salvage value when no longer useful for
tlie purpose for which such property was acquired.

511 As to both fee owner and lessee, the capital invested in physical
property, upon which the depreciation deduction is computed,
should be segregated in the books of accoxmt from that invested in
the oil or gas territory or in the lease or leases, with respect to which
the deduction for depletion or return of capital is claimed, and
credits for depreciation may be made in the same manner as here-
inbefore provided for depletion.

STATEMENT REaUIRED.

615 To each return made by an individual or corporation owning and
operating oil or gas properties there should be attached a statement
showmg —

513 (1) («) The fair market value of the property (exclusive of ma-
chinery, equipment, etc.) as of March 1, 1913, if acquired prior to
that date, or (6) the actual cost of the property if acquired subse-^
quent to that date; ■•'•

INCOME TAX. 87

' (2) How the fair market value as of March 1, 1913, was ascer- 514
tained ;

(3) The estimated quantity of oil or gas in the sand at the time the 515
value or cost was determined ;

(4) Amount of capital applicable to each unit ; 516

(5) The quantity of oil or.gas produced during the year for which 517
the return is made ;

(6) Any other data which would be helpful in determining the 518
reasonableness of the depletion deduction.

If the operator is a lessee that fact should be stated, and to the 519
return made by such lessee there should be attached a statement
showing —

(1) The amount of cash or its equivalent actually paid for the 530
lease ;

(2) The amount expended for development prior to the receipt 521
of incorae from the output, sufficient to pay operating expenses ;

(3) The total capital thus invested; 522

(4) The estimated quantity of oil or gas in the territory com- 523
prised in the lease ;

(5) The amount of capital applicable to each unit; 524

(6) The number of units removed during the year for which the 525
return is made, and other data that would be helpful in determin-
ing whether or not the deduction made for the return of capital

is a reasonable allowance.

MINING COEPOHATIONS.

Art. 171. Paragraphs " seventh " and " eighth " of section 5 (a) 526
and paragraph " second " of section 12 (a) of Title I of the act of
September 8, 1916, authorize individuals and corporations to deduct
from gross income " a reasonable allowance for exhaustion, wear and
tear of property, and * * * (&) in the case of mines, a reasonable
allowance for depletion thereof not to exceed the market value in
the mine of the product thereof which has been mined and sold
during the year for which the return and computation are made " ;
provided, that when the sum of the annual allowances for depletion
equals the capital originally invested, or in case of purchase prior
to March 1, 1913, the fair market value as of that date of the mineral
" in place," no further allowance on this apcount shall be made.

Ownership of the mine content at the time for which computation 527
is made is an essential prerequisite to an allowable deduction for
depletion.

The deduction in the case of a lessee will be limited to an amount 533
equal to the capital actually invested in the leasey without regard to
value as of Marcl^ 1, 1913, or any other date.

88 INCOME TAX.

629 The paragraphs of the title, above referred to authorize in the
case of mine owners two classes of deductions to take care of the
wasting of assets, namely, (a) depreciation, (5) depletion. ■

DEBUCTIOHS AND VALUATION.

530 Art. 172. If the property was acquired by purchase or otherwise
(other than by lease) prior to March 1, 1913, the amount of invested
capital which may be extinguished through annual depletion deduc-
tions from gross income will be the fair market value of the mine
property so acquired, as of March 1, 1913. The value contemplated
herein as the basis for depletion deductions authorized by tjiis title
must not be based upon the assumed salable value of the output
under current operative conditions, less cost of production, for the
reason that the value so determined would comprehend the profits
to bo realized from operation of the property.

531 Neither must the vakie determined as of March 1, 1913, be specu-
lative, but must be determined upon the basis of the salable value
en Hoc as of that date of the entire deposit of minerals contained I
in the property owned, exclusive of the improvements and develop-
ment work ; that is, the price at which the natural deposits or min-
eral property as an entirety in its then condition could have been
disposed of for cash or its equivalent.

532 The en Hoc vahie having been thus ascertained, an estimate of the
number of units (tons, pounds, etc.) should be made. The en lloe
value divided by the estimated number of units in the property will
determine the per unit value, or amount of capital applicable to
each unit, which, multiplied by the number of units mined and sold
during any one year, will determine the sum which will constitute
an allowable deduction from the gross income of that year on ac-
count of depletion.

533 Deductions computed on a like basis may be made from year to
year during the ownership under which the value was determined,
until the aggregate en bloc value as of March 1, 1913, of the mine or
mineral deposits shall have been extinguished, after which no fur-
ther deduQition on account of depletion with respect to this property
will be allowed to the individual or corporation under whose owner-
ship the en bloc value was determined.

FAIE MAKKET VAITJE, MARCH 1, 1913.

i

634 The precise detailed manner in which the estimated fair market
value of mineral deposits as of March 1, 1913, shall be made must
naturally be determined by each individual or corporation interestedj
and who is the owner thereof, upon such basis as must not compre- j

INCOME TAX. 89

hend any operating profits, the estimate in all cases to ba subject to
the approval of the Commissioner of Internal Revenue.

In any case in which a corporation uses for purposes of its incca::,': ^^^
return an estimate of the value of mines or of mineral lands or prop-
erties as of March 1, 1913, as the, basis of computing amounts to be
deducted for depletion or return of capital, this department in passing
upon the accuracy and fairness of such estimate will attach due
Weight to the market value of the stock of the corporation on March
1, 1913, and also to sworn statements as to the valiJ«v of capital stock
of the corporation filed at any time thereafter for purposes of the
special excise tax on corporations based on value of their capital
stocks imposed by Title IV of the act of September 8, 1 916.

In any case in which any depletion deduction is computed on the ^^®
basis of the cost or price at which any mine, mineral lands, or prop-
erties were acquired the corporation will be required upon request of
the Commissioner of Internal Revenue to show that the cost or price
at which the property was bought was fixed for purposes of a bona
fide purchase or sale by which the property passed to an owner in
fact as well as in form, different from the vendor. No fictitious or
inflated cost or price will be permitted- to form the basis of any calcu-
lation of a depletion deduction, and in determining whether or not
the price or cost at which any purchase or sale was made represented
the actual market value of the property sold due weight will be
given to the relationship or connection existing between the party or
J)arties selling the property and the buyer thereof.

RECOKDS TO BE KEPT.

Every individual or corporation claiming and making a deduction J)37
for depletion of natural dei^osits shall keep an accurate ledger ac-
count, in 'which shall be charged the fair market value as of March-
1, 1913, or the cost, if the property was acquired subsequent to that
date, of the mineral deposits involved. This account shall be cred-
ited with the amount of the depletion deduction claimed and allowed
each year, or the amount of the depletion shall be credited to a
3epletion reserve account, to the end that when the sum of the
credits for depletion equals the value or cost of the property no
further deduction for depletion with respect to this property will be
allowed. The value determined and set up as of March 1, 1913, of
the cost of the property if acquired subsequent to that date will bo
the basis for determining the depletion deduction for all subsequent
years during the ownership under wliich the value was fixed, and
during such ownership there can be no revaluation for the purpose
of this deduction if it should be found that the estimated quantity.

90 INCOME TAX.

of the mineral deposit was understated at the time the value was
fixed or at the time the property was acquired.

538 In cases wherein the quanity of the mineral deposit in the mine
prior to March 1, 1913, can not be estimated with any degree of
accuracy, it will be necessary, if depletion deductions are to be taken,
for the individual or corporation owning the deposits, with the best
information available, to arrive at the fair market value of the
property as of March 1, 1913 ; that is, its fair cash value en bloc, if
such value is believed to be other than its original cost, which value,
during the period of the ownership under which it was doterminedj
shall be final and shall be charged to the property account as herein-
before indicated, and then, on the basis of the most probable number
of units in the property, the per unit value shall be determined as
the basis for computing annual depletion allowances, this method
and allowances to be continued until, but not beyondy(tho time when
the value as of March 1, 1913, shall have been extinguished.

WHEN TO USE ORIGINAL COST BASIS.

539 The original cost of the mineral deposit may be taken as the basis
foT computing annual depletion deductions if the fair market value
as of March 1, 1913, as hereinbefore required, can not be ascertained
otherwise, allowance being made for minerals which may have been
removed prior to that date.

540 In cases wherein a mineral property was acquired subsequent to
March 1, 1913, the same rule for computing the annual depletion de-
duction will apply, except that in such case the basis of the computa-
tion will be the actual cost rather than the value as of March 1, 1913.

541 A lessee cprporation is not entitled to any depletion deduction as
• such, but if such lessee, in addition to royalties, pays a stipulated

sum for the right to explore, develop, and operate a mine, such sum
may be spread ratably over the estimated number of units in the
mine, and thus ascertain the amount of invested capital or bonus pay-
ment applicable to each unit. The per unit cost thus ascertained will
be multiplied by the number of units removed from the mine during
any one year and the result will be the amount that may be deducted
from the grcjs income of that year as a return of the capital in-
vested. In the case of both mine owner and lessee no deduction for
depletion or return of capital will be allowed when the invested cap-
ital haj through the aggregate of all such deductions been extin-
guished.

LESSEE'S COMPTTTATION OF INVESTED CAPITAL.

542 For the purpose of computing this deduction in the case of a lessee
company, the actual amount of the bonus payment and not a value

INCOME TAX, J^l

as of March 1, 1913, will be considered the invested capital to be re-
turned through the aggregate of the annual deductions.

To the return made pursuant to the above rule there should be at- 543
tached a statement setting out (1) whether the operator is a fee
owner or lessee; (2) in the case of a fee owner, (a) the fair market
value of the mineral deposits as of March 1, 1913, if the property
was acquired prior to that date, (h) the cost of the mineral property
if acquired subsequent to that date; (3) the method by which the
value as of March 1, 1913, was determined, in case the property was
acquired piior to that date; (1) the estimated quantity in units in
the mine as of March 1, 1913, or at the date of purchase if acquired
subsequent to that date; (5) amount of capital ^^plicable to each
unit; (6) the number of imits removed and sold during the year for
which the return was made; and C^) any other data which would be
helpful in determining the reasonubkncss of the depletion deduc-
tion claimed in the return.

In the case of a lessee, the statement should show (a) the amount 544
of the bonus or other payment made for tlie light to operate the
mine; (&) the period covered by the lease, and the estimated quan-
tity of units in the mine when the lease contract was entered into.

In addition to the deduction hereinbefore provided for, the oper- 545
ator will be permitted to deduct from the gross income of each year
a reasonable allowance for depreciation of all physical property used
ill connection with the operation of the mine, and owned by the oper-
ator. For this purpose the actual cost (not value) will be equitably
distributed over the useful life of such property until the true sal-
vage value has been reached.

Both owner and lessee will keej) accurate ledger accounts to which 546
will be charged the capital invested in the mine or lease and in ma-
chinery, equipment, etc., crediting such accounts or a depletion and
depreciation reserve account, with the amount claimed and allowed
as a deduction each year until as a result of such credits the capital
charge shall be extinguished, after -which no further deduction on
these accounts will be allowed.

UTILES FOE TIMBER-OWNING LUMBEE COMPANIES.

Art. 173. Corporations owning timber land and logging off the 54'?
timber and manufacturing it into lumber, will, if the timber was
acquired prior to March 1, 1913, be permitted to exclude from gross
income either through a deduction from' gross receipts or through a
charge into the cost of manufacturing the timber into lumber, an
amount equivalent to the fair market price or value of the standing
timber as of Maroli 1, 1913.

92 INCOME TAX.

348 In order to secure the benefit of this deduction such corporations
must set up on their books as of March 1, 1913, the fair market price
en bloc, of all the timber then owned by them, and then, by dividing
this en Hoc value by the estimated number of feet (board measure)
in the entire timber holdings, the per unit value or price as of March
1, 1913, will be ascertained, which per unit price or value will be the
basis for measuring the amount which may be added to the cost of
manufacture, or deducted from, gross income, until the en hloo
value of the entire holding as of March 1, 1913, shall have been
extinguished, after which no further deduction on this account shall
be allowed.

649 The same rulsj^will apply in the case of timber or timber lands
purchased subsequent to March 1, 1913, the only difference being
that actual cost — that is, the gross purchase price — shall, in making
the computation, be substituted for en Hoc price or valile as of that
state. If the entire market price or value of both timber and lands
as of March 1, 1913, or the entire cost, if acquired subsequent to that
date, is extinguished through a deduction from gross income for
timber used, or through a per unit charge to cost of manufacturing
lumber, then the entire amount realized from the logged-off lands
or for other salvage will be returned as income of the year in which
such lands are sold or disposed of.

"^" If the timber or timber lands are sold en hloc, the gain or loss
will be ascertained on tlie basis of the difference betAveen the fair
market price, or cost, and the selling price, according as the prop-
erty was acquired prior or subsequent to March 1, 1913.

851 The fair market price or value of timber or timber lands as of
March 1, 1913, is the price at which the j^roperty in its then condi-
tion, and with the circumstances then surrounding it, could have
been sold for cash or its equivalent. This value must not be specula-
tive, but must be determined without taking into account any pros-
pective profits that may result from the manufacture of the timber
into lumber. It must be, as the law contemplates, a fair market
value and, once determined, must be set up on the books, and, as the
measure of a stumpage deduction for income-tax purposes, must
remain canstant and can not be increased except as new purchases
are made at a higher average cost. The value so set up as of March
1, 1913, will be subject to the approval of the Commissioner of
Internal Revenue.

552 Art. 174. Patents, deduction for return of capital invested therein. — An
allowable deduction for any given year for return of capital in-
Tested in patejits at time of issue will be an amount equal to one-
seventeenth of the actual cost, in cash or its equivalent, of such pat-
ents. Where the patent has been secured from the Government, its

INCOME TAX. 9S

cost will be represented' by- the various Government fees, cost of
drawings, experimental models, attorneys' fees, etc., actually .paid.
Where the patent has been purchased for a cash consideration, the
amount paid therefor would represent the capital invested therein.
If the corporation purchased a patent and made payment therefor '
in stocks or other securities, the actual cash value of such stocks or
other securities at the time of the purchase will represent the cost
or capital invested in the patent. If the patent was purchased after
a part of its life had expired, the cost for the purpose of a deduction
for return of capital will be ratably spread over the remaining years
of its life. If the patent becomes obsolete prior to its expiration,
it will be permissible for the corporation to deduct from gross in-
come such proportion of its original cost (less any amount previously
charged off) as the number of years of its remaining life bears to the
whole number of years intervening between the date it was ac-
quired and the date it legally expires. In determining the amount
deductible on account of the expiring life of patents only the actual
cost thereof and not an estimated value as of March 1, 1913, or any
other date, will be consid^ed.

Art. 175. Cost of successful drawing, models, etc., capital. — ^When a S53
corporation has made expenditures for designs, drawings, patterns,
or models representing work of an experimental nature and such
designs, drawings, patterns, or models prove to be satisfactory and
result in the production of salable goods, they will be treated as a
ca^pital asset, and the entire cost thereof, including experimental and
development expenses, will be capitalized, in which case no part of
such expenditures shall be included in expenses of running the busi-
ness and shall not be treated as a deduction from gross income.

Art. 176. Cost of unsatisfactory models, drawings, etc., a loss. — If, 554
however, the designs, drawings, patterns, or models prove by actual
experience to be unsatisfactory and do not result in the production
of salable goods and have no asset value, such expenditures when
charged off may be included as a loss incident to running the busi-
ness and as such deducted from gross income, provided that the cor-
poration in taking credit for such expenditures in its income tax
return shall make a full and complete explanation with respect to
"the same and to the satisfaction of the Commissioner of Internal
Eevenue.

Art. 177. Obsolescence of models, drawings, etc., deductible as a loss. — 555
If designs, drawings, patterns, or models result in the production of
goods which prove to be salable for a certain length of time and
then become obsolete and can not be sold, the amount expended for
such designs, drawings, patterns, or models, less any amounts pre-
viously claimed as depreciation with respect to the same or as a re-

94 INCOME TAX.

turn of capital, may when charged off, be included in, and deducted
as a loss incident to running the business, provided full and coniT
plete information is reported in a manner satisfactory to the Com-
missioner of Internal Eevenuc.

556 Art. 178. Obsolescence deductible, cost less depreciation and salvage.— :
Amounts representing losses on account of obsolescence of physical
property may be included as a deduction from gross income as a loss,
provided such amounts have been recorded in the booljs following

' the condemnation and withdrawal from use of the obsolete property.
The amount of obsolescence that may be claimed as a deduction shall
be ascertained by deducting from the cost of the property the total
amount that has been previously claimed and deducted on account
of the depreciation of the property, plus the residual value at time
of obsolescence, or plus the amount received for the sale of the
property. The obsolescence deduction must not include the accu-
mulated depreciation applicable to prior years.

557 Art. 179. Obsolescence when no depreciation is deducted. — If no de-
preciation has been charged off against such property and deducted
from gross income of prior years, the amount allowable as a de-
duction for the year in which the property beconies obsolete shall be
ascertained by deducting from the cost of the property its residual
value plus an amount equal to the depreciation actually sustained
during the prior period and which might have been deducted when
computed at the rate applicable to the same or similar property.
The amount of depreciation thus arrived at as applicable to former
years may be made the basis of amended returns and a claim for the
refund of taxes overpaid by reason of the fact that no depreciation
deduction was claimed in those years.

INTEREST.

558 Art. 180. Limit of interest deductions. — Section 12, paragraph
" Third." authorizes a domestic corporation having capital stock to
deduct from gross income the amount of interest paid within the
year (except on indebtedness incurred for the purchase of obliga-
tions or securities, the interest upon which is exempt from taxation
as income under this title) on its indebtedness to an amount of such'
indebtedness not in excess of the sum of its entire paid-up capital
stock plus one-half of the interest-bearing indebtedness, both out-
standing at the close of the year; that is to say, the maximum prin-
cipal upon which deductible interest may be computed is the amount
of paid-up capital stock plus one-half the interest-bearing indebted-
ness outstanding at the close of the year.

559 Paid or charged as a liability. — The amount of interest thus com-
puted at the contract rate, if actually paid within the year, may be

INCOME TAX. 95

deducted, or if the accounts of the company are kept on a basis
other than actual receipts and disbursements, the amount of interest
actually accrued at the contract rate, if computed on an amount net
in excess of the maximum principal as hereinbefore indicated, may
be deducted, provided it is so entered upon the books as to constitute
a liability against the assets, and provided it does not include in-
terest on indebtedness incurred in the purchase of securities, the
income from which is not subject to the income tax.

In ascertaining the maximum principal for this purpose, preferred 56,0
stock will be treated as paid-up capital stock and not as indebtedness.

Art. 181. The full amount of stock as represented by the par value 561
of the shares issued and outstanding is, for the purpose of this title,
regarded as the paid-up capital stock, except when such stock is
assessable on account of deferred payments or is payable in install-
ments, in which case the amount actually paid on such shares will
constitute the actual paid-up capital stock 6i the corporation.

In cases wherein shares of stock are issued without par or nominal 562
value, "the paid-up capital stock" for the purpose 'of arriving at
the maximum principal will be the amount of cash paid into the
corporation or the cash Value at the time acquired of the property
given in exchange for such stock; that is, the cash or its equivalent
in value which the corporation received for the stock issued. (T. D.
1960.)

Where there is no capital stock thfe entire amount of capital (not 563
including interest-bearing indebtedness) employed in the business
plus one-half of the interest-bearing indebtedness outstanding at the
close of the year constitutes the maximum principal upon which
deductible interest can be computed. (T. D. 1960.)

Capital employed in the business, as here used, and as constituting 664
one of the elements in computing an allowable interest deduction,
contemplates the entire capital paid in by members of the company,
including so much of the accumulated surplus as is actually used or
employed in the business and properties of the corporation, but does
Twt include any borrowed capital or interest-bearing indebtedness.

Art. 182, The qualifying phrase " outstanding at the clo^e of the 565
year" is held to apply to paid-up capital stock or capital invested,
and interest-bearing indebtedness, which indebtedness, like the paid-
up capital stock or capital invested, is required by the law to be
reported, in making return of annual net income, as outstanding at
the close of the year. From the amount of indebtedness to be so
reported there must be eliminated all indebtedness incurred in the
purchase of securities the income from which is not subject to the
income tax. •

The indebtedness hereinbefore referred to, and which is to be 566
reported in the return for the purpose of determining the maximum

96 INCOME TAX.

■principal upon which the interest deduction is to be computed, shall
not include noninterest-bearing indebtedness.

567 If no indebtedness is outstanding at the close of the year, the
maximum deduction allowable on account of interest paid will be
the amount of interest paid on an amount of indebtedness (other
ihan indebtedness incurred in the purchase of securities, 'the income
from whicli is exempt from income tax) not exceeding at any time
within the year the entire paid-up capital stock or capital employed
in the business outstanding at -the close of the taxable year; that is,
in such case the paid-up stock or capital invested outstanding at the
close of the year measures the highest amount of indebtedness upon^
which deductible interest can be computed. (T. D. 1960.)

568 Art. l83. Different rates of. — Interest on bonded or other indebted-
ness bearing different rates of interest may be deducted from gross
income during the year, provided the aggregate amount of such in-
debtedness on which interest is paid does not exceed the limit pre-
scribed by law and in case the indebtedness is not in excess of the
amount on which deductible interest may be legally computed. In
such case the indebtedness bearing', the highest rate may be first con-
sidered in computing the interest deduction, and the balance, if any,
will be computed upon the indebtedness bearing the next lower rate
actually paid, and so on until interest on the maximum principal
allowed has been computed. . -

569 Art. 184. Property not for sale in the ordinary business.- -Corpora-
tions owning property such as oiKce buildings, hotels, apartment
houses, etc., which are not for sale in the ordinary business of the
corporation, biit are held primarily for investment purposes or as
a means by which the business of the corporation is carried on, and
which are pledged as security for mortgaged notes or bonds upon
which interest is paid, can not deduct such interest under the deduc-
tion for expense of maintenance and operation, but shall include
such interest payments, subject to the limitation of the law, under
the regular interest deductions.

570 Art. 185. Preferi-ed stock. — So-called interest on preferred stock,,
which is in reality a dividend thereon, can not be deducted in arriv-
ing at the net income. For the purpose of the tax, dividends of
whatever character can be paid only out of net income, and the net
income is subject to the tax, and for this purpose can not be reduced
by any distribution among, or payment to its stockholders.

571 Art. 186. Interest on indebtedness as rental.— Interest paid pursuant
to contract on an indebtedness secured by mortgage on real estate
occupied and used by a corporation, in which real estate the corpora*
tion has no equity o» to which it is not taking title, is an allowable
dediiction from gross income as a rental charge, payment of which is
required to be made as a condition to the continued use and posses-

INCOME TAX. 97

sioii of the property. If, however, the corporation has an equity in
or is purchasing for its own use the real estate upon which such mort-
gage is a prior lien, the indebl^edness will be held to be indebtedness
of the corporation within the meaning of the law and the interest
paid on such mortgage will be deductible only to the extent that,
including interest on other obligations of the corporation, it is v/ithin
the limit fixed by the law. (T. D. 2090, 1993.)

Art. 187. Interest on capital or surplus. — Interest calculated as being 572
a charge against income on account of capital or surplus invested in
the business but which does not represent a payment on an interest-
bearing obligation, is not an allowable deduction from gross income —
that is to say, the interest which the money would earn if otherwise
invested is not a deductible charge against income.

Art. 188. Car-trust certificates. — Equipment or car-trust certificates 573
issued by or for railroad companies are a means by which such com-
panies secure cars or other equipment, or the money with which, such
equipment is purchased.

The equipment becomes at once an asset of the company and the 574
trust certificates secured by such asssts are obligations of the railroad
companies, similar to corporate bonds, mortgages, and like obliga-
tions. The trustees in whose names legal title to the equipment
stands, are not an association within the meaning of this title, aiid
are therefore not a taxable entity, but they are, for the purpose of
this title, a fiscal agent, paying off the obligations, both principal and
interest, of the railroad companies with funds appropriated by such
companies.

The railroad companies may include these trust certificates in T;he 575
amount of their bonded or other indebtedness reported under item 2
of the return Form 1031, and the interest paid thereon, with interest
paid on other obligations, will be deductible, the aggregate amount
so deducted not to exceed the limit fixed by law.

If the certificates contain a contract or provision by which the 576
.obligor agrees to pay any portion of the tax imposed by this title
upon the obligee or reimburse the obligee for any portion of the tax,
or to pay the interest without deduction for any tax which the obligor
may be required to pay, the trustees in such cases, in making interest
payments on these certificates, will, in the absence of claims for ex-
emption when interest payments are made to individuals, withhold
the normal income tax on such payments regardless of the amount
thereof.

■ Art. 189. Sinking funds Invested in bonds of corporation. — If the 577
trustees of a sinking fund established by a corporation have invested
the:amount of the sinking fund reserve or any portion of it in the
bonds of the corpomtion and such corporation pays to the trustees
33272°— 18 7

98 INCOME TAX.

the interest on those bonds, such corporation will be permitted to de-
duct such interest from its gross income, provided the amount of the
interest thus paid, plus the interest on_any other outstanding indebt-
edness vrhich it may have, does not exceed the limit fixed by law. The
interest paid to the trustees, together with all other earnings on in-
vestments made by the trustees of the sinking fund, must be inchided
in the gross income of the corporation. (T. D. 2161.)

578 Art. 180. Interest on deposits. — In the case of banks and banking
aasociations, loan or trust companies, interest paid within the year
on deposits or on moneys received for investment and secured by
interest-bearing certificates of indebtedness issued by such bank,
banking association, loan or trust company, may be allowably de-
ducted from the gro.ss income of such corporation.

TAXES.

579 Art. 191. Taxes deductible. — Taxes imposed against a corporation
by authoriiy (,'f tlie United States (except income and excess-profits
taxes) its territories or any foreign country, or by authority of any
State, county, school district, municipalitj', or other taxing sub-
division of a State (not including those assessed against local bene-
fits) and paid within the year for which the return is made, are
deductible from the gross income of a domestic corporation.

680 Similar taxes with like exceptions, assessed against and paid by
a foreign corporation receiving income from any source withih the
United States, are deductible from its gross income received from
such source, except that taxes imposed by a foreign government and
paid by a foreign corporation are not deductible from the gross
ijicorae received by it from sources within the United States. (T. D.
21.52.)

681 Art. 192. Taxes paid for shareholders. — Banks paying taxes assessed
against their stockholders on account of their ownership of the
shares of stock issued by such banks can not deduct the amount of
taxes so paid in making their returns for the purpose of the income
tax imposed by this title unless and to the extent that the laws of
the State in which they do business by specific term.s make the tax
a direct liability of such banks, that is, a lien upon its property.
The shares of stock are the property of the stockholders, and to the
extent that the taxes assessed on the value of the shares of stock are
property taxes the holders are primarily liable for their payment.

582 The fact that State laws make it the duty of banks to pay the tax
does not necessarily make the tax a liability of the banks.. These
provisions of State laws are intended only to provide a convenient
means whereby the tax assessed against the stock on the basis of its
value can be the more readily collected by the tax-collecting officers

- INCOME TAX. 99

and do not attempt to assert liability against the bank, as is evi-
denced by the fact that in most, if not all, cases the tax is a lien upon
the stock. For this purpose the liability of the bank is limited to
the duty to collect or withhold from the stockholders the araounr
of taxes due and to pay the same over to the proper tax-collecting
offices. Federal statutes prohibit States from imposing any tax
upon national banks except upon the value of their real estate.
In cases where States levy a tax on the stock of such banks and
make it the duty of the banks to pay such tax for the stockholders
such payments are Bot deductible from the gross income of such
banks. ,(T. D. 2121, 2152.)

This rule applies only to taxes levied upon the value of the capital 583
stock, and it is not intended to so operate as to prevent banking cor-
porations from deducting from their gross income any State tax
imposed against the corporation itself on the value of its real estate,
furniture and fixtures, or as an excise or a franchise^ tax; that is, a
tax which the corporation is required to pay to the State on account
of its own property or business in order that it may transact business
within the State is deductible. (T. D. 2152, 2121.)

The rule hereinbefore set out will apply in the case of corpora- 584
tions other than banks, xipon the value of whose stock taxes are
asse,ssed to the stockholders.

Art. 193. Tax-free bonds. — In the case of boKKis or other forms of 585
indebtedness issued with ajguaranty that the interest thereon shall
be free from taxation as against the holder the corporation paying
the tax pursuant to its guaranty, whether Federal, State, or mu-
nicipal, will not be permitted to deduct the tax so paid. The tax
assessable upon this income is a direct liability of the recipient, and
the debtor corporation paying it does so voluntarily or at least in
pursuance of a contract voluntarily entered into, which contract is
in no wise binding upon or to be recognized by the Government in
determining the tax liability of the corporation. Hence taxes so
paid are not deductible from the gross income of the debtor, (T. D.
2161.)

Art. 194. Local benefits. — So-called " taxes," more properly assess- 586
ments, paid for local benefits, such a^ street, sidewalk, and other
like assessments, imposed because of and measured by some benefit
inuring directly to the property against which the assessment is
levied, do not constitute an allowable deduction from gross income.
Taxes deductible are those levied for the public welfare by the
proper taxing authorities at a like rate against all property in the
territory over which such authorities have jurisdiction.

Special assessments, such as are hereinbefore contemplated and 587
which are measured upon the basis of the benefit flowing directly

100 INCOME TAX.

to the property, are not deductible, even though an incidental benefit
may inure to the public welfare. (T. D. 2090.)
588 Art. 185. Import or tariff duties.— Import or tariff duties levied by
act of Congress and paid to the proper customs officers, stamp taxes,
and all other taxes (except income and excess profits taxes) imposed
by internal-revenue laws and paid to collectors are deductible as
taxes imposed under authority of the United States, provided they
are not added to and made a part of the cost of articles of merchan-
dise with respect to which they are paid, in which case they will be
refiected in the cost of merchandise and can not be separately de-
ducted.

HET INCOME.

539 Art. 18G. Act of September 8, 1916, as amended.— The net income
upon which the tax imposed by section 10 of Title I of the act of
September 8, 1916, as amended, is levied is that portion of the gross
income received from all sources (except from interest on the obliga-
tions of the United States or its possessions, or on the obligations of
a State or political subdi^■ision thereof) which remains after all au-
thorized deductions have been taken into accoimt.

590 Art. 197. Net income, foreign corporation. — For the purpose of the
tax the net income of foreign corporations shall be ascertained by de-
ducting from the gross amount of income received in this country
the deductions enumerated in the act, which deductions shall be lim-
ited to expenditures or charges actually incurred in the maintenance
and operation of the business transacted and capital invested in the
United States or, as to certain charges, such proportion of the aggre-
gate charges as the gross income from business done and capital in-
vested in the United States bears to the aggregate income within and
without the United States ; that is to say, the deductions from gross
income of a foreign corporation doing business in this country or
receiving income from sources within the United States, must, as
nearly as possible, represent the actual expense and authorized charges
incident to the business done and capital invested in this country and
must not comprehend, either directly or indirectly, any expenditures
or charges incurred in the transaction of business or the investment
of capital without the United States. (T. D. 2137, 2161.)

CREDITS.

691 Art. 198. Tax withheld at source. — In making its return a foreign
corporation may take credit against the tax assessable on the basis
of the net income so returned for any tax which may have been with-
held at the source, provided the income upon which the tax was with-

INCOME TAX. 101

held is included in the return and provided that the name of the
withholding agent is given in the return.

War income tax.— For the purpose of the assessment of the war 592
income_ tax of 4 per cent the net income of a corporation shall be
credited with the amount received as dividends upon the stock or
from the net earnings of any other corporation which is taxable upon
its net income" under this title, and which amount has been included
in the gross income.

Art. 199. If a corporation shall have returned as income, interest 593
received on bonds, the interest upon which the debtor corporation
had agreed to pay without deduction of income taxes, and if the
debtor corporation shall have actually paid the income tax assessable
on such interest income, it will be permissible for the corporation
receiving such interest to take credit against the tax assessable on
the basis of its net income returned, for the amount of tax paid
thereon by the debtor corporation.

When the net income has been ascertained in accordance with the 594
rule set out in section 12 (a) of the act of September 8, 1916, as
amended by the act of October 3, 1917, the net income so ascertained
shall be credited with the amount of excess-profits tax assessed or to
be assessed for the same year.

The excess-profits tax assessed or to be assessed is allowed as a 595
credit against th'e net income for the purpose of the taxes imposed
by both the act of September 8, 1916, and the act of October 3, 1917.

WITHHOLDING OF TAX AT SOITRCE.

Art. 200. On dividends paid foreign corporations. — Under section 596
13 (/) of the act of September 8, 1916, as amended, dividends upon
the capital stock or from the net earnings of domestic or other resi-
dent corporations, joint-stock companies or associations, and insur-
ance companies payable to nonresident alien companies, corporations,
joint-stock companies or associations, and insurance companies not
engaged in business or trade within the United States and not having
any office, agent, or place of business therein, shall be subject to a
withholding of the tax at the rate of 2 per cent for the year 1916
and thereafter.

When the record owner of such stock is a nonresident alien cor- 597
poration, joint-stock company or association, or insurance company
not having an office, agent, or place of business in the United States,
the debtor corporation will withhold and pay the tax to the proper
officer of the United States authorized to receive it, in jnanner and
form provided for withholding and accounting for tax withheld.

102 INCOME TAX.

598 Exempt from witMiolding.— To enable debtor corporations, joint-
stock companies or associations, or insurance companies in the United
States, to distinguish between nonresident alien corporations, joint-
stock companies or associations, or insurance companies which have
and those AVhich do not have any office, agent, or place of business in
the United States, and also to enable such nonresident alien corpora-
tions, joint-stock companies or associations, or insurance companies
as have an office or place of business in the United States, to claim
exemption from withholding of the normal income tax on such divi-
dends, a certificate stating that such corporation, joint-stock com-
pany or association, or insurance company has an office or place of
business in the United States will be filed with the debtor corporation.

589 Art. 201. Actual owner a nonresident corporation. — The duty of with-
holding income tax from dividends rests upon domestic or other
resident corporations paying the dividend. When it shall be made to
appear that the actual owner of its stock is a nonresident alien cor-
poration, it shall be the duty of the debtor or issuing corporation in
the United States to withhold the income tax from the amount of
dividend it pays to each nonresident alien corporation and to make
return of such withholding on monthly return Form 1012. An
annual return, which is a summary of such monthly returns, shall be
filed on or before March 1 of each year for the preceding calendar
year.

600 When stock in a domestic or resident alien corporation, whose net
income is subject to the normal income tax, is issued in the name of
another than a nonresident alien corporation, the dividends on such
stock will not be subject to withholding of the normal tax under the
provisions of section 13 (/), except when the debtor corporation or
its withholding agent has knowledge that the actual owner of the
stock is a nonresident alien corporation, subject to withholding.

601 Record owner liable to tax. — In all cases where the actual owner of
stock is a nonresident alien corporation and the record owner is an
individual, firm, or corporation in the United States, citizen, or
resident alien, and the actual ownership has been disclosed, the
record owner will be held for income-tax purposes to have the re-
ceipt, custody, control, and disposal of the dividend and will be
required to make return for the actual owner and pay the tax found
by such return to be due.

602 Credit for tax withheld. — If for any reason there is included in the
return which a foreign corporation is required to make of all income
received from sources within the United States any income upon
which tax has been withheld at the source, such foreign corporation
may take credit against the amount of tax due for the amount of
the tax so withheld at the source; provided a statement is attached

INCOME TAX. 103

to the return setting forth the source and amount of the income upon
which the tax was so withheld.

Art. 202. Under section 13 (e) of the act of September 8, 1916, as 603
amended by the act 'of October 3, 1917, interest on bonds of domestic
corporations, joint stock companies or associations, and insurance
companies, payable to nonresident alien corporations, is subject to
deduction of tax at the source at the rate of 6 per cent (2 per cent
under the act of Sept. 8, 1916, and 4 per cent under the act of
Oct. 3, 1917). Foreign corporations will file ownership certifi-
cate Form 1000 in presenting coupons for payment. If a foreign
corporation has an office, agent, or place of business in the United
States, certificate Form 1001 shall be filed establishing such fact
' and relieving the corporation from deduction of the tax at the source.

Interest on corporate bonds. — If a foreign corporation having no 604
office, agent, or place of business in the United States receives income
from sources within this country, other than that upon which the tax
has been withheld at the source, it shall make a return of annual net
income to the collector of internal revenue at Baltimore, Md., ac-
counting for therein all the income received during the year from
all sources in the United States, including that upon which the tax
has been withheld, taking credit for the amount of the tax so with-
held at the source under the conditions hereinbefore set out.

Nothing in the foregoing provisions shall be construed to relieve 605
a foreign corporation having income from sources within the United
States from making a return of annual net income.

RETUENS.

Art. 203. When required. — Every corporation not specifically enu- 608
merated as exempt shall make a return of annual net income whether
or not it may have for the particular year any net income, or whether
or not it shall be a subsidiary of or controlled by another corporation,
and such return, if made on the basis of a calendar year, must be
filed with the collector on or before March 1, next following the year
for which the return is made ; if on the basis of a fiscal year ending
with a date other than December '31, it must be filed within 60 days
after the close of such fiscal year.

* « ***** 607

Dissolved corporations to make final return. — All corporations hav- 608
ing an existence as such during all or any portion of a year, unless
coming within the class specifically enumerated as exempt, are re-
quired to make returns, Corporations dissolved during the year and
whose fiscal year coincides with the calendar year will make returns
covering the period from January 1, to the date of dissolution, and

104 INCOME TAX.

such corporations having a fiscal year other than the calendar year,
will make returns covering the period from the beginning of the
fiscal year to the date of dissolution, and new corporations will make
returns for the period from the date of organization to December 31,
unless a fiscal year is designated in the proper manner, in which
case returns for a period from the date of organization to the close
of the fiscal year so established, in no case to exceed 12 months, will
be filed.

609 New corporation. — A new corporation making a return for a prop-
erly established fiscal period less than 12 months, but embracing parts
of two calendar years, must file its return within 60 days from the
last day of the designated fiscal year.

610 In the absence of notice, fiscal year returns not acceptable. — A return
made on the basis of a fiscal year other than the calendar year can
not be accepted, unless such fiscal year shall have been established by
proper notice to the collector of internal revenue of the district in
which such corporation has its principal place of business (T. D.
2090, 21.52, 2137), and if in the absence of such notice and designa-
tion a return is filed subsequent to the date when it was required to
be filed if made on a calendar-year basis, it will be considered de-
linquent and the corporation will be liable to the penalty imposed
for failure to file the return within the prescribed time.

611 Art. 204. Date of filing and execution. — In all cases where a fiscal
year is not established as above prescribed, returns must be made on
the basis of the calendar year, in which case such returns must be
filed on or before the 1st day of March next succeeding such calendar
year. Such returns in either case provided must be verified under
oath or affirmation of its president or other principal officer, and its
treasurer or assistant treasurer; that is to say, by two different per-
sons acting in the official capacity indicated.

612 Art 205. liquidating corporations. — A corporation going into liqui-
dation during any tax period may, at the time of such liquidation, -
prepare a " final return " covering the income received or accrued to
it during the fractional part of the year during which it was engaged
in business, and immediately file the same with the collector of the
district in which the corporation has its principal place of business.
Before distributing its assets, a dissolving corporation should reserve
funds sufficient to pay any income tax assessable against it. Other-
wise the tax may be collected by suit against the stockholders. (T. D.
2209, 2090.)

gl3 Art. 206. Change of corporate name.^A mere change in name does
not constitute a new corporation. If the business was continuous
throughout the year, no change in management or operation other
than the change in name having occurred, the return should be made
covering the business transacted throughout the year, such return

IKCOME TAX, 105

to be made by the corporation in the name which it bears at the
end of the year, with a notation on the return to the effect that the
name had been changed, giving both the old and the new names.
If, however, a distinctly new corporation was organized to take
over the property ef the old, both corporations will be required to
make separate returns covering the periods of the year during which
they were respectively in charge of the business. (T. D. 2137.)

Art. 207. Branch corporations.— For the purpose of the tax and for 614
the purpose of a return, every corporation is held to be and is a
separate and distinct entity. The fact that a branch corporation is
organized in any State to meet peculiar conditions there existing and
which make it impracticable for the parent company as such to do
business in such State, although such subsidiary may be to all intents
acd purposes a mere branch of th^ parent company, does not re-
lieve it from the necessity of making a return for each year.

If such branch corporation actually transacts business from which 615
income arises, accrues, and is received by it, it will be incumbent
upon such corporation to make a detailed return, as if it were in no
way related to any other corporation, setting forth in t such return
the full amount of income which it receives or which accrues to it,
together with the authorized deductions therefrom, and upon any
net income thus disclosed the tax will be assessed and required to
be paid.

Income of subsidiary paid to parent taxable as dividends. — If the net 618
income upon which the tax has been levied and is payable is turned
over to the parent company, the holder of its stock, the amount
so turned over will be held to be dividends, or amounts paid to
it out of net earnings and must be returned by the parent com-
pany for the purpose of the 2 per cent tax imposed by the act
of September 8, 1916, but for the purpose of the war income
tax imposed by Title II of the act of October 3, 1917, the net income
of the parent company may be reduced by the amount of dividends
£0 received.

Art. 208. Subsidiaries operated as integral parts. — If subsidiary cor- 617
porations exist in name only, or are mere agents or integral parts of
the parent corporation and as such transact no business and have no
income of and for their own account, and incur no expenses, all busi-
ness being transacted, all income being received and all expenses be-
ing paid directly by the parent company, no separate accounts being
kept by or for such subsidiaries, it will be considtered that such
subsidiary concerns do not have any taxable income within the mean-
ing of this title, and so long as they are so operated no tax liability
will be asserted against them.

Subsidiaries to make returns,— In such cases, however, such sub- 618
sidiary corporations will be required to make returns of annual net

106 IN'COME TAX.

income, and shall indorse thereon a statement to the eflPect that the
corporation making the return is a subsidiary or integral part of
the parent company (naming it) and that, for its own account, it
has no income from any source whatever, that it makes no dis-
bursements, and that all the business done in its name is done for
the account of and is the business of the parent corporation, and
will be accounted for in the return of such parent ct)rporation.
B19 Branches having income on their own account. — This ruling is not
intended to cover those subsidiary corporations which actually transact
business in their own names, receive income for their own account,
which incur and pay expenses incident to the production of such
income, which keep separate books of account, and which, as separate
entities, exercise all the powers and functions authorized by their
charters. Corporations of the latter character will be required to
pay the income tax on the net income received by them from all
sources, regardless of the fact that such net income is paid- or turned
over to a parent or holding company, by whom it must also be re-
turned for the purpose of the tax imposed by section 10 of the act of
September 8, 1916. -

620 In the latter case it is held that both the parent and subsidiary|
companies must make separate returns. (T. D. 2090, 2137, 2161.) ^

621 Art. 209. Eeceivers to make returns. — Section 13, paragraph C, of
this title requires receivers, trustees in bankruptcy, or assignees,
who are in charge of and are operating the property and business of
corporations, to make returns of annual net income and pay any
income tax thereby shown to be due, regardless of what disposition,
subject to the orders of the court, may be made of such income.

622 Notwithstanding the fact that the powers and functions of the
corporation are suspended and that the property and business are
for the time in control and custody of the receiver, trustee, or
assignee, subject to the orders of the Court, such receiver, trustee, or
assignee stands in the place of the corporate oiRcers and is required
for the purpose of this title to perform all the duties and assume all
the liabilities which would devolve upon the officers of the corporation
were they in control. The income which he receives on account of
the business transacted is the income of the corporation and, no
matter how such income is applied, it is subject to the tax imposed
by this title in so far as it exceeds the deductions or allowances
authorized by law.

623 The receiver, trustee, or assignee acting for the corporation, is re-
quired to make a true and accurate return of annual net income cover-
ing each year or part of each year during which he is in custody
and control of the business or properties and will be liable to all the
penalties imposed by this title for failure to meet any of its re-
quirements.

INCOME TAX, 107

Art. 210. Prescribed forms.— Eeturns made under this act and pur- 624
suant to these instructions must be made on the forms prescribed by
this department for each particular year, and which are available at
the offices of collectors.

Tentative returns. — In the absence of a prescribed form a statement 525
made by a corporation disclosing its gross income and deductions
therefrom may be accepted as a tentative return, and if filed within
the prescribed time a return so made will relieve the corporation
from liability to the penalties imposed by law, provided that upon
request and without delay such tentative return be substituted, by
a return made on the regular form. (T. D. 2137.)

Art, 211. Fiscal year. — Section 13 (a) of this title authorizes cor- 626
porations desiring to do so to make their returns on the basis of a
fiscal year other than the calendar year, provided that 30 days prior
to the 1st day of March of the year in which the return would be
due if made on a calendar-year basis they file a notice in writing
.■with the collector of internal revenue, designating in such notice
the last day of some month (other than December) as the close of
their fiscal year. In the case of a corporation which had previously
made its return on a calendar-year basis, notice designating a fiscal
year having been filed as hereinbefore indicated, such corporation
.■will, on or before March 1 next following the closing date so desig-
nated, make a return for the fractional part of the calendar year
ended with the date designated as the close of the fiscal j'ear. All
returns thereaftei' must be made for the full fiscal year, and must
be filed with the collector on or before the last day of the 60-day
period next following the date designated as the close of the fiscal
year. For instance, if a corporation made its i-eturn for the calendar
year ended December 31, 1916, and desires thereafter to make returns
as of a fiscal year ended May 31, it may, 30 days prior to March 1,
1918, file a notice in writing with the collector designating May 31
as the close of its fiscal year, whereupon, on or before March 1, 1918,
it will make a return for the fractional period from January 1 to
May 31, 1917. Thereafter, on or before July 30 (60 days after May
31) of each year, it will make a return for the preceding full fiscal
year.

Art. 212. Hew corporation. — In the case of a new corporation, which 627
shall have established a fiscal year in the manner hereinbefore indi-
cated, it may make its first and ail subsequent returns on the basis
of the year so established, provided that in no case shall a return
cover a period greater, than 12 calendar months. In the absence of
a properly established' fiscal year, returns must be made on the cal-
endar-year basis.

Art. 213. Change from one fiscal date to another. — In order to change 628
the closing date of the fiscal year from the last day of one month to

108 INCOME TAX.

that of another (other than December) the corporation must at least
30 days prior to the first day of March next following the closing
. date of the previously established fiscal year file with the collector,
in writing, a notice designating the last day of some other month as
the close of its fiscal year, in which case a return for the fractional
period ending with the date last designated must be made on or
l)efore the last day of the 60-day period next following the close of
such previously established fiscal year.

629 Art. 214. Must make return for fiscal year. — "When a corporation has,
in- the manner provided by law, established a fiscal year other than
the calendar year as the basis for making its return, it is bound by
such action to make its returns on such basis until such fiscal year
be properly changed. Failing to make its returns on the basis
designated and within the prescribed time will subject the corpora-
tion to the penalties imposed by this title for delinquency. (T. D.
2001, 2029, 2090, 2137.)

630 Art. 2lB. If it shall appear in any case that returns have been
made to the collector on the basis of a fiscal year not designated as
hereinbefore indicated, the corporation making such returns will be
advised that such returns can not be accepted, but must be made to
cover the business of the calendar year.

631 Art. 216. Forms to be furnished. — Under the authority conferred
by this title, forms of return have been prescribed in which the
A'arious items specified in the law are to be stated. Blank forms of
this return will be forwarded to collectors and ^lould be furnished
to every corporation, not expressly exempted, on or before January
1 of each j^ear, in the case of corporations making their returns for
the calendar year on or before the first day of the next fiscal year
in the case of corporations filing returns for their fiscal year. Fail-
ure on the part of any corporation, joint-stock company, association,
or insurance company liable to this tax to receive a prescribed blank
form will not excuse it from making the return required by law or
relieve it from any penalties for failure to make the return within
the prescribed time.

632 Failure to receive returns. — Corporations not supplied with the
proper forms for making the return should make application there-
for to the collector of internal revenue in whose district are located
their principal places of business in ample time to have their re-
turns prepared, verified, and filed with the collector on or before the
last due date defined by the law and these regulations.

633 Fifty per cent additional tax,— Failure in this respect subjects the
corporation to not only 60 per cent additional tax, but to the spe-
cific penalty imposed by the law for delinquency. Each corporation
should carefully prepare its return so as to fully and clearly set
forth the data therein called for. Imperfect or incorrect returns
win not be accepted as meeting the requirements of the law.

INCOME TAX. . 109

Art. 317. Change from fiscal to calendar year. — The normal period 634
for which returns are required to be made is the calendar year and
the normal due date for filing such return the 1st day of March next
following ~ December 31. If a corporation, which had previously
established a fiscal year other than the calendar year as the basis
for making its return, desires to establish the calendar year basis, it
may do so by filing not less than 30 days prior to March 1 next
following the closing date of the established fiscal year, a notice in
writing with the collector, designating December 31 as the close of
its year, in which case it must on or before the 1st day of the March
next following file a return covering that period between the closing
date of its previously established fiscal year and December 31.

Art. 218. " Last due date." — " Last due date," as used in these regu- 635
lations, is construed to mean the last day upon which a return is re-
quired to be filed in accordance with the provisions of the law, or
the last day of the period covered by an extension of time granted by
the collector or Commissioner of Internal Revenue.

Art. 219. Sunday or holidays. — When the last due date as above ggg
defined falls on Sunday or a legal holiday the last due date for filing
returns v/ill be held to 'be the day following such Sunday or legal holi-
day and the return should be made to the collector not later than such
following day, or, if placed in the mails, it should be posted in ample
time to reach the collector's office, under ordinary handling of the
mails, on or before the date on which the return as here indicated
is required to be filed in the office of the collector.

Art. 220. Eeturns forwarded by mail. — If a return is made and 937
placed in the United States mails in due course, properly addressed,
and postage paid, in ample time to reach the office of the collector or
deputy collector on or before the last due date, no penalty will bo
held to attach should the return not be actually received by such
officer until subsequent to that date. In cases wherein a question may
be raised as to whether or. not the return was posted in ample time
to reach the collector's office on or before the date due, the envelope
in which the return was transmitted should be preserved by the col-
lector of internal revenue and forwarded to the Commissioner of
Internal Eevenue with the return.

Art. 221. Eefusal or neglect to make returns. — In cases wherein cor- g3g
porations have neglected or refused to make returns, and in cases
wherein returns are found, upon investigation or otherwise, to bo
false or fraudulent, the commissioner may, upon discovery thereof,
at any time within three years after such return is due, make a return
upon the information obtained in the manner provided in the act,
and the tax so discovered to be due, together Avith the additional tax
prescribed, shall be assessed, and the amount thereof shall be paid
immediately upon notice and demand.

110 INCOME TAX.

639 For the purpose of verifying the accuracy of a return, or for
making one where none is made, the books of corporations and all
other relative data shall be open to the inspection of the Commisj f
si oner of Internal Revenue or liis duly authorized agents.

640 Art. 222. Extension of time ; collector. — ^In cases wherein a corpora-
tion fails or neglects to file its return within the prescribed time, and
such neglect is due to sickness or absence, the collector is authorized
to grant an extension of the time within which to file the return,
which extension must not exceed 30 days from the normal due date.
The application for such extension must be made prior to the expira-
tion of the period for which the extension is desired. Otherwise the
return will be considered delinquent and liability to penalty will
attach.

641 Art. 223. Absence or sickness. — Absence or sickness of one or more
officers, at the time the return is required to be filed, will not be
accepted as a reasonable cause for failure to file the return within
the prescribed time, unless it is satisfactorily shown that there were
no other principal officers available and sufficiently informed as to
the affairs of the corporation to make and verify the return.

642 Art. 224. Commissioner may extend time. — ^In meritorious cases the
Commissioner of Internal Revenue is authorized to grant a further
reasonable extension of time in which returns may be filed, provided
the reason for the request therefor is presented fully in writing and
is considered good and sufficient.

643 Art. 225. Delay due to reasonable cause. — In case of any failure to
make and file a return within the time prescribed by law, or within
the period of extension granted by the collector, the Commissioner of
Internal Revenue shall add to the tax 50 per cent thereof, except |
that where a return is voluntarily filed, after the due date, without
notice from the collector, and it is shown that the delinquency was
due to a reasonable cause and not to willful neglect, no such addi-
tion shall be made to the tax.

644 Statement under oath of cause of delay. — In all such cases the col-
lector will note on the return that the return was voluntarily filed
without notice from him, and will procure from the corporation to
be forwarded with the return a statement, under oath, setting out
in specific terms the cause of the delay, and if such cause is found
to be reasonable, that is, a cause which, had the corporation exer-
cised ordinary business care and prudence, would have made it im-
practicable or impossible to file the return within the prescribed
time, the 50 per cent addition will not be made to the tax.

645 Exemption from the 50 per cent additional tax will not, howeve%:. i
necessarily relieve the corporation from liability to the specific
penalty, viz, a penalty of not to exceed $10,000.

INCOME TAX. Ill

Art. 226. Inspection of returns; copies of returns. — When the assess- 646
ments shall have been made the returns shall be filed in the office of
the commissioner and shall constitute public records, subject to in-
spection upon the order of the President, under the rules and regula-
tions prescribed hj the Secretary of the Treasury and approved by
the President. Copies of returns on file in the commmissioner's
office are not permitted to be sent to any person, except the corpora-
tion itself or to its duly authorized attorney. A duly authorized
attorney for this purpose is one possessing a properly executed power
of attorney in writing by the corporation, which designation shall
be signed by two officers of the corporation and bear the impress
of the seal. . ,

Art. 227. Certified copies. — At the request of the Attorney General 647
or a United States district attorney, certified copies of returns may
be made by the Commissioner of Internal Revenue and delivered to
the United States district attorneys for their use as evidence in the
prosecution oi' defense of suits in which the collection or legality of
the income tax assessed on the basis of such returns is involved, or,
by special permission of the Secretary of the Treasury, such cer-
tified copies of returns may be furnished as evidence in any suit
to which the United States Government and the corporation, etc.,
making the returns ar,e parties, or as evidence before any United
States grand jury, and in which, in the opinion of the Attorney
General, such certified copies would constitute material evidence.
(T. D. 2016.) '

Art. 228. Penalty 50 per cent additional. — In section 3176, as incor- 648
porated in and made a part of this title, it is provided that —

In case of any failure to make and file a return within the time prescribed by 649
law or by the collector the Commissioner of Internal Revenue shall add to the
tax 50 per centum of its amount, except that when a return is voluntarily and
Without notice from the' collector filed after such time and it is shown that the
failure to file it was due to a reasonable cause and not to vi^ilfull neglect, no
such addition shall be made to the tax.

The time " prescribed by the collector " relates to an extension of ^^^
time, not exceeding 30 days from the normal due date, on or before
iWhich the return is required to be filed. That is to say, if upon
application by a corporation, an extension of time is granted by the
collector the return must be filed on or before the last day of the
iextended period. Otherwise the 50 per cent tax will be added, sub-
ject to the provisions above quoted.

Art. 229. Disclosure of return — Penalty. — The disclosure by a col- 631
lector, deputy collector, agent, clerk, or other officer or employee of
the United States, to any person not legally authorized to receive
the same, of any information whatever contained in or set -forth by

112 INCOME TAX

any return of annual net income made pursuant to this act, is, by the
act, made a misdemeanor, and is punishable by a fine not exceeding
$1,000, or-by imprisonment not exceeding one year, or both, in the
discretion of the court, and if the olFender is an officer or employee
of the United States he shaU be dismissed and be incapable thereafter
of holding any office under the United States Govermnent.

COLLECTION AND PAYMENT OF TAX.

652 Art. 230. When payable. — In the case of returns made on the basis
of a calendar year, the corporations against which taxes are assessed
shall be notified of the amount thereof on or before June 1 of each
successive year, and the taxes shall be paid on or before June 15 of
the year in which the assessment is made. ,

653 Corporations making returns on the basis of a fiscal year other than
the calendar year shall be notified of the amount assessed against
them on or before the last day of the 90-day period next following
the date when the return was due, and the taxes shall be paid within
105 days from the due date of the return. ,

gg4 Extension of time making return does not extend time of payment.—
Any extension granted by the collector or commissioner of the time
within which to file returns will not be construed to correspondingly
extend the time for the payment of the tax. If for any reason a re-
turn should not be made until the time fixed by law for the payment
of the tax has passed, the tax assessed on the basis of such return
shall be paid upon notice and demand.

655 Additional assessments. — In cases wherein additional assessments
are made as a result of an examination or audit of the return, the
taxpayer shall, immediately following the making of the assessment,
be notified of the amount thereof, and such taxes shall be paid within^
10 days from the date of such notice.

656 Art. 231. Penalties for failure to pay tax when due. — Upon failure
to pay the tax when due and for 10 days after notice and demand,
a penalty of 5 per cent of the amount of tax unpaid and interest at
the rate of 1 per cent per month imtil paid shall be added to the
amount of such tax. To the amount assessable on the basis of the net
income there shall be added 50 per cent in case of refusal or neglect
of a corporation to make return, and 100 per cent in case of a false
or fraudulent return, and the corporation so offending shall be liable
to a specific penalty not exceeding $10,000.

g57 Art. 232. Penalty for delay and for fraudulent return. — Any person-
or officer of any corporation required by law to make, render, sign,
or verify any return, who makes any false or fraudulent return or
statement with intent to defeat or evade the assessment required by

INCOME TAX, 113

Parts II and III of Title I of the act of September 8, 1916, shall be
guilty of a misdemeanor and shall be fined not exceeding $2,000, or
be imprisoned not exceeding one year, or both, at the discretion of the
court, with the costs of prosecution.

Art. 233. Collection of tax due prior to three-year period. — Section 14 658
authorizes the Commissioner of Internal Eevenue in cases of refusal
or neglect to make returns, or in cases of erroneous, false or fraudu-
lent returns, upon discovery thereof at any time within three years
after said returns are due, to make returns upon information ob-
tained and assess the tax thus found to be due against such corpora-
tions and collect it in the ordinary statutory method; and section 38,
act of August 5, 1909, and section 2, act of October 3, 1913, contaui
similar provisions. Under this provision, it appears that the com-
missioner is without authority to make a formal assessment of special
excise or income tax unless the liability therefor has been discovered
within three years from the date when the return is due. This limita-
tion does not, however, limit the right of the Government t/) claim
and collect, by suit or otherwise, any additional tax fwtrnd due for
a period antedating the three-year limitation.

May be collected by suit. — ^In numerous cases the courts have held 659
that there is no limitation upon the right of the Government to sue
for and recover unpaid taxes. It is rot essential that assessment be
made ;'or, if made, that it be made within a specified time. If liability
to original or additional tax exists or has been discovered, the amount
thereof may be recovered by suit, regardless of the fact that no assess-
ment of the amount has been made, and regardless of the date of its
discovery or the period for which the tax is due.

Time for assessment may be waived. — While the Government is fully qqq
authorized to recover such taxes by suit, it is desirable, in order to
obviate needless expense and annoyance to the taxpayer and the Gov-
ernment, that the collection be made as a result of a formal assess-
ment. In order that this may be done, corporations owing additional
taxes for aiiy period antedating the three-year limitation should file
amended returns, together with a statement formally waiving the
three-year statutory limitation and consenting to assessment. In
executing such amended returns or waivers, the corporations forfeit
none of their rights under the law, and no penalty is incurred which
might not be otherwise enforced by suit.

Art. 234. Past due taxes voluntarily paid. — If the corporation against 661
which additional tax liability is discovered will formally accept the
findings of the examining ofiicer and agree to voluntarily pay the
additional tax to the collector of internal revenue and does so pay
the additional tax, amended returns or waivers will hot be required.

33272°— 18-: 8

114 la^COME TAX.

MISCEILANEOTJS PSOVISIONS UNDER THE ACT OF OCTOBEB. 3, 1917.

662 Art. 235. Fiscal year ending during 1916.— Section 25 provides :

That income on which has been assessed the tax imposed by Section II of
the act entitled "An act to reduce tariff duties and to provide revenue for the
Government, and for other purposes," approved October third, nineeen hundred ^
and thirteen, shall not be considered as income within the meaning of this
title : Provided, That this section shall not conflict with that portion of section
ten, of this title, under which a taxpayer hay fixed its own fiscal year.

663 This provision is intended to exclude from taxable income under
this title, any income received after January 1, 1916, which, in returns
for periods prior to that date, has been accounted for on an accrual
basis, and upon which the tax has been assessed and paid ; that is to
say, any income returned upon which the tax imposed by the act of
October 3, 1913, had been assessed though actually received subse-
quent to January 1, 1916, is not subject to the tax imposed by this
title.

gQ4 Art. 236. life insurance premiums not deductible. — Section 32 of the
act of September 8, 1916, specifically provides that premiums paid
by corporations for insurance covering the lives of officers, employees,
or those financially interested in the trade or business of such corpora-,
tions, shall not be deducted from the gross income of the corporations
paying the same. This provision is held to apply to all forms oi life
insurance, the premiums upon which the corporations may pay,
whether or not the corporations are the beneficiaries of the insurance
policies upon the death of the insured, and all rules and regulations
in conflict with this article are hereby revoked.

6G5 Art. 237. Return covering dividends paid. — ^Under the provisions of
section 26 of the act of September 8, 1916, as amended, every corpo-
ration subject to the tax imposed by this title, shall, when" required ao
to do by the Commissioner of Internal Revenue, render a correct
return under oath, in which is set out the amount of dividends paid
by it during the year covered by the return, whether paid in cash
or its equivalent in stock ; the names and addresses of its stockhold-
ers, the number of shares owned by each, the tax years in which the
amounts distributed were earned, and the amounts so distributed to
each stockholder, applicable to the earnings of each of such years.

6G6 This return, when required, will be made upon a form prescribed
for this purpose, and will he forwarded direct to the office of the
Commission,er of Internal Revenue within 10 days from the date of
the receipt of the notice requiring such return.

667 Art. 238. Section 10 (&) of the act of September 8, 1916, as
amended by the act of October 3, 1917, provides that there shall be
levied, assessed, collected, aiid paid a tax of 10 per cent upon the
amount remaining undistributed six months after the end of each ,
calendar or fiscal year of the total net income of every corporation,

INCOME TAX. 115

]'oint-stock company or association, or insurance company, but this
tax shall not apply to that portion of such undistributed net income
invested or employed in the business or retained for employment in
the reasonable requirements of the business or invested in the obli-
gations of the United States issued after September 1, 1917.

in order to determine the amount of such net income subject to this 668
tax, the increase in the surplus balance at the close of the taxable year
as compared with the surplus balance at the beginning of such year,
shall be analyzed so as to account for the disposition thereof in
increase in assets, decrease in liabilities or in dividends, and the net
increase in current assets over current liabilities shall be subject to
the above tax of 10 per cent unless it can be conclusively shown by
the corporation that such increase is retained to provide for an actual
increase in business or for additions to plant or the reduction of
bonded or other fixed liabilities.

INSURANCE COMPANIES.

Art. 239. Tax liability.— Under the provisions of Title I of the 669
act October 3, 1917, a tax of 4 per cent in addition to the tax of 2 pdr
cent is imposed upon the net incomes of foreign and domestic insur-
ance companies operating in the United States (with the exception
of Porto Eico and the Philippine Islands), determined in accordance
with the conditions prescribed in the act September 8, 1916, except
that dividends received from other corporations subject to the income
tax are not subject to the 4 per cent war-income tax.

Net income, how ascertained. — For this purpose the net income of 670
an insurance company is to be ascertained (with the exceptions herein-
after noted) in the same manner as directed by the tei-ms of the in-
come-tax law approved September 8, 1916, except that for the pur-
pose of the 4 per cent war-income tax, a credit against the net in-
come is -permitted, representing the amount of dividends received
upon the stock or from the net earnings of any other corporation,
joint-stock company or association, or insurance company, which is
taxable upon its net income under this title.

Returns to conform to State reports. — Eetums of insurance com- 671
panics must be rendered in conformity with reports made for the
same period to the State insurance departments. As all insurance
companies are required by law to render their reports to the various
State insurance departments for the calendar year, their returns of
annual net income for the purpose of the income tax should be made
for the same period, unless their books are actually kept on a fiscal-
year basis.

Treasury Decision 2433, providing that returns may be made on a 672
basis other than as above set forth, is not applicable to insurance
companies.

116 INCOME TAX.

673 Gross income. — Gross income of insurance companies consists of the
total revenue derived from the operation of the business, including
income, gains, or profits from all other sources within the calendar
j'ear for which the return is made, except as modified by the special
provisions of law which apply to insurance companies.

674 Gross income, as defined above, will include net premiums, invest-
ment income, income from the sale of capital assets, all gains, profits,
and income as reported to the State insurance departments, except
the items specifically exempted in the act, as construed by these regu-
lations.

675 Exempted income. — There is specifically exempted from taxation
■interest received on obligations of the United States or its possessions,

or on the obligations of a State or any political subdivision thereof.
Therefore, in ascertaining gross income for the purposes of the tax,
all interest received from such sources should be eliminated. (Ee-
port to State, schedule D, parts 1 and 4.) As accrued interest on
bonds purchased is not included in the interest income reported to the
State insurance department, it must, not be included in the amount
eliminated from gross income in the return. (Eeport to State,
sAiedule D, part 3.) In the case of obligations of 'the United States
issued after September 1, 1917, income from such obligations is ex-
empt from tax only to the extent provided in the act authorizing
their issue. Income from such obligations received by insurance com-
panies is exempt from the 2 per cent and 4 per cent income tax.

676 Copy of report to State. — ^As an assistance in auditing the returns,
wherever possible, a copy of the report to the State insurance depart-
ment should be submitted with the returns; otherwise schedule D,
parts 1, 3, and 4, of the report should be attached thereto showing
Federal, State, and municipal obligations from which the interest
omitted from gross income was derived.

677 Amounts representing reinsurance treaties will be eliminated from
income and disbursements.

67S Deposit premiums on perpetual risks received and returned should
be treated in the same manner, as no reserve will be considered cover-
ing liability for such deposits, but the earnings on such deposits will
be included in the premium income.

679 Sale of capital assets. — For the purpose of ascertaining the gain or
loss from sale or other disposition of ledger assets acquired prior to
March 1, 1913, the fair market price or value of such assets as of
March 1, 1913, shall be the basis for determining the amount of such
gain or loss to be accounted for in the return of the year in which
the assets are sold. If acquired subsequent to March 1, 1913, then
the profit or loss to be returned or claimed will be the difference
between the cost and the selling price.

INCOME TAX. 117

Eeinsurance and return premiums should not be included in gross 680
income nor in deductions.

■ Exempted organizations. — There are exempted under the provisions 681
of the act fraternal beneficiary societies, orders, or associations oper-
ating under the lodge system or for the exclusive benefit of the
niembers of a fraternity itself operating under the lodge system and
providing for the payment of life, sick, accident, or other benefits
to the members of such societies, orders, or associations or their
dependents; and farmers' and other mutual hail, cyclone, or fire
insurance companies, or like organizations of a purely local char-
acter, the income of which consists solely of assessments, dues, and
fees collected from members for the sole purpose of meeting expenses.

lodge system. — A society or association " operating under the lodge 682
system " is considered to be one organized under a charter, with prop-
erly appointed or elected officers, with an adopted ritual or cere-
monial, holding meetings at stated intervals, and supported by fees,
dues, or assessments.

Affidavit required. — It is not sufficient that companies of the fore- 683
going classes merely claim exemption, hut it must be shown by
affidavit or otherwise to the satisfaction of the Commissioner of Inter-
nal Eevenue that the conditions set forth in the exempting provisions
have been fully met.

In ascertaining the net income of an insurance company, for the 684
purpose of the tax imposed by this title, the general provisions con-
tained in the law and elsewhere in these regulations will be observed,
except as modified by specific legislation or regulations concerning
insurance companies,

DEDTTCTIONS.

Art. 240. The following deductions from gross income will be 685
allowed in returns made by insurance companies other than mutuals,
but including mutual life and mutual marine.

All ordinary and necessary expenses paid within the year in the 686
maintenance and operation of the company and its properties.

Interest. — Interest paid on indebtedness wholly secured by prop- 687
erty collateral the subject of sale or hypothecation in the ordinary
business of the company as a dealer only in the property constituting
such collateral or in the loaning of funds thereby produced is an
allowable deduction as a business expense to an amount of the inter-
est paid on such indebtedness not in excess of the actual value of the
collateral securing it.

Incidental repairs. — Expenditures for incidental repairs which do 688
not add to the value nor appreciably prolong "the life of property
are deductible as expenses, but expenditures for new buildings, per-

118 . INCOME TAX.

manent improvements, or betterments which increase the value of
property, or for restoring or replacing property, are not deductible
under this or any other item of the return. Such expenditures are
properly chargeable to capital account, to be extinguished through
annual depreciation allowances.

689 Cost of furniture. — Insurance companies will be permitted to add
to expenses, in lieu of depreciation of furniture and fixtures, the
actual cost of repairs, replacements, and renewals of such furniture
as is reported to the State insurance department. Provided that in
case of an original investment the cost thereof shall be charged to
capital account.

690 Premiums paid. — Premiums paid on life insurance policies covering
the lives of officers, employees, or those financially interested in any
trade or business conducted by an individual, partnership, corpora-
tion, joint-stock company or association, or insurance company, shall
not be deducted in computing the net income of insurance companies.

691 Losses actually sustained. — Losses deductible (other than policy pay-
ments) must be distinguished from depreciation or allowances for
exhaustion, wear and tear. The losses must be absolute, complete,
actually sustained during the year, and charged off on the books of
the company, and if the losses result from the sale of assets acquired
prior to March 1, 1913, such losses shall be ascertained by taking the
difference between the fair market price or value asof March 1, 1913,
and the selling price. If the assets were acquired subsequent to
March 1, 1913, the loss will be the amount by which the selling price
is less than the cost.

692 Losses compensated by insurance or otherwise are not deductible.

693 Agency balances.— There may also be deducted losses from agency
balances or other amounts charged off as worthless, and losses by
defalcation, premium notes voided by lapse, provided such notes have
at some time been included in gross income for income tax purposes;
otherwise, they will not be deductible.

694 Policy losses. — As payments on policies there should be reported all
death, disability, or other policy claims (other than dividends) paid
within the year, including fire, accident, and liability losses, matured
endowments, annuities, payments on installment policies, surrender
values, and all claims actually paid under the terms of policy con-
tracts.

695 Het addition to reserve funds.— AM folicy -premiums, on which net
addition to reserve is computed, must he included in gross income.
The net addition may be based upon the highest authorized reserve by
the statutes of any States in which the company does business. When
the reserve at the end of the year is less than at the beginning of the
year there is a " released reserve," and the amount so released must

INCOME TAX. 119

be included in gross income. In the case of assessment insur-
ance companies, whether domestic or foreign, the actual deposit of
sums with State or Territorial oificers, pursuant to law, as additions
■to guaranty or reserve funds shall be treated as being payments re-
quired by law to reserve funds. In the case of life insurance compa-
nies, the net addition to the " reinsurance reserve " and" the " reserve
for supplementary contracts," and in the case of fire, marine, accident,
liability, and other insurance companies, the net addition to the " un-
earned-premium reserves," and only such other reserves as are specifi-
cally required by the statutes of the States within which the company
is doing business will be allowed as deductions.

Taxes paid for stockholders. — Taxes paid by companies on the value (
of their capital stock outstanding and in the hands of stocldiolders
are not deductible. Such taxes are a primary liability of the stock-
holders and therefore chargeable against their (the stockholders')
income.

Dividends from foreign corporations. — Insurance companies claiming 697
as a deduction from gross income, for the purpose of the -1 per cent
war income tax, dividends received from foreign organizations must
accompany their returns by a list giving the names of such organiza-
tions and the amount received from each.

LIFE INSURANCE COMPANIES.

Art. 241. Surrender values. — Gross income of life insurance com- 698
panics should include, in addition to income heretofore defined, sur-
render values applied in any manner, consideration for supplemen-
tary contracts involving and not involving life contingencies, and all
other income, gains or profits.

Applied surrender values and consideration for supplementary 699
contracts, not involving life contingencies included in income, will,
of course, be deducted as payments under policy contracts; but for
convenience in verifying the returns these items should appear in the
return in both gross income and deductions.

Premium income paid back. — ^Life insurance companies are author- 700
ized to omit from gross income such portion of any actual premium
received from any individual policyholder as shall have been paid
back or credited to the policyholder or treated as an abatement of
his premium.

The amount authorized by this provision to be excluded from gross 701
premium income on account of any premium refunded to any in-
dividual policyholder is explicitly limited to an amount not in excess
of the actual premium paid by the individual policyholder within
the tax year.

Cash dividends. — ^Life insurance companies are entitled under the 702
foregoing holding to exclude from gross income any part of the pre-

120 INCOME TAX-.

mium received Avhich is paid back to the individual policyholder
within the same return year. Where the dividend is in excess of
the premium received, there can be excluded from gross income only
the amount of the premium received from such individual policy--
holder within the same return year.

703 Dividends provisionally ascertained. — Dividends provisionally ascer-
tained, apportioned, or credited on deferred dividend policies can
not be excluded or deducted from gross income for the reason that
the assured has no vested or enforceable right in them and can not,
at the time of the ascertainment, apportionment, or credit, nor until
the maturity of the policy, avail himself of such dividends ; and in
the event of the death of the assured prior to the expiration of the
deferred dividend period, the amount so ascertained, apportioned, or
credited lapses.

MUTITAI INSTJBANCE COMPANIES OTHEB, THAN MUTUAL LIFE
AND MUTUAL MARINE.

704 Art. 242. The act of September 8, 1916, provides:

That mutual fire and mutual employers' liability and mutual workmen's com-
pensation and mutual casualty insurance companies reciuiring their members to
make premium deposits to provide for losses and expenses shall not return as
Income any portion of the premium deposits returned to their policyholders,
lut shall return as taxable income all income received by them from all other
sources plus such portions of the premium deposits as are retained by the com-
panies for purposes other than the payment of losses and expenses and re-
insurance reserves.

705 The forCigoing provision is construed to embrace all mutual in-
surance companies (other than mutual life and mutual marine and
companies exempt) ; interinsurance and reciprocal exchanges and
returns of annual net income should be made on the special form
(No. 1030A) provided for that purpose.

f06 Gross income, — Gross income 6f such companies will consist of the
total revenue derived from the operation of the business but exclud-
ing all income received from premiums, assessments, fees, and other
amounts paid by the policyholders necessary to secure or continue
the policy in force. If, however, any portion of the funds thus
received is retained or finally used for any purpose other than the
payment of losses, expenses, or reinsurance reserves, such portion
is, by the terms of the law, taxable and must be returned as income.

707 Rent income. — All payments received' in cash or its equivalent, as
rent on buildings or other property owned or controlled by the com-
pany making the return,, must be returned as taxable income, after
deducting the amount paid for repairs and expenses, including taxes

INCOME TAX. 121

(levied for purposes other than local benefits) as has heen expended
on the property from which the rental income returned was derived.

Sale of capital assets. — The profit or income to be returned in the 708
event of the sale or maturity of capital assets acquired prior to
March 1, 1913, should be determined upon the basis of the differ-
ence between the fair market value of such assets as of that date
and the selling price thereof. If the assets were acquired subsequent
to March 1, 1913, the loss will be the amount by which the selling
price is less than the cost. This profit or income may, for the pur-
pose of the tax, be reduced by the amount of any loss resulting from
the same source and ascertained in the same manner. In no event
can a loss resulting from the sale or maturity of capital assets ex-
ceed the gain within the year from like transactions.

Other income. — All other income or earnings not hereinbefore re- 709
ferred to will form a part of and must be reported as taxable income.

MUTUAL MARIITE INSURANCE COMPANIES.

Art. 243. Premiums repaid and interest. — Mutual marine insurance 710
companies may include in their deductions from gross income
amounts repaid to policyholders on account- of premiums previously
paid by them and mterest paid upon such amounts between the date
of ascertainment thereof and the date of payment thereof, such
amounts and interest having been included in gross income, which
amounts deducted from gross income should be fully set forth in the
supplementary statement of the return form.

FOREIGN INSURANCE COMPANIES.

Art. 244. Foreign insurance companies. — Insurance companies or-7U
ganized, authorized, or existing under the laws of any foreign gov-
ernment shall report as gross income the gross amount received
within the year from all sources within the United States or its
possessions. Income from business transacted by a United States
branch or agency of a foreign insurance company which relates to
a foreign country must be returned as gross income. Otherwise
articles applicable to insurance companies in general will be followed
as to income and deductions.

Income from investment. — ^Insurance companies organized, author- 713
ized, or existing under th^ laws of any foreign government, not
transacting an insurance business in the United States or its pjos-
sessions but receiving income ixoxa. investments therein must make
returns of such income, deducting therefrom tbifi ajuount of such
income withheld at the sourco.

122 INCOME TAX.

ASSESSMENT LIFE AND ACCIDENT INSTJaANCE COMPANIES;
STOCK FIRE INSURANCE COMPANIES; STOCK CASITAITY,-
FIDELITY, AND SURETY INSURANCE COMPANIES; MISCELLA-
NEOUS STOCK COMPANIES.

713 Art. 245. Companies of the foregoing classes will make their re-
turns in accordance with articles applicable to insurance companies
in general.

714 Art. 246. Except as otherwise specially provided in the law or in
these regulations, the general regulations liereinbefore provided for
the use of corporations, joint-stock companies, or associations will
be observed by insurance companies in making their returns.

CLAIMS.

EEFTTND OR ABATEMENT OF INCOME TAX.

715 Art. 247. Section. 3218, Revised Statutes.— Every collector shall be
charged with the whole amount of taxes, whether contained in lists
transmitted to him by the Commissioner of Internal Revenue or by
other collectors, or delivered to him by his predecessor in office, and
with the additions thereto, * * *, and with all moneys collected
for penalties, forfeitures, fees, or costs ; and he shall be credited with
all payments into the Treasury made as provided by law, * * *^
and with the amount of taxes contained in the lists transmitted, in
the manner heretofore provided, t© other collectors, and by them
receipted as aforesaid; also with the amount of the taxes of such
persons as may have absconded or become insolvent prior to the day
M^hen the tax ought, according to the provisions of law, to have
been collected, and with all uncollected taxes transferred by him,
or by his deputy acting as collector, to his successor in office: Pro-
vided, That it shall be proved to the satisfaction of the Commis-
sioner of Internal Revenue, who shall certify the facts to the (First)
Comptroller of the Treasury, that due diligence was used by the
collector. And each collector shall also be credited with the amount
of all property purchased by him for the use of the United States,
provided he faithfully account for and pay over the proceeds there-
of upon a resale of the same, as required by law.

CREDIT TO COLLECTORS FOR TAXES CHARGES AGAINST THEM WHICH

ARE UNCOLLECTIBLE.

716 ■^t- 248. Collectors are entitled to credit fOr taxes assessed against
parties who may have absconded or become insolvent prior to the
day when the tax ought, according to the provisions of the law, to
have been collected : Provided, That it shall be proved to the satis-
faction of the Commissioner of Internal Revenue, who shall certify

INCOME TAX. 123

tke fact to the Auditor for the Treasury Department, that due dili-,
gence was used by the collector.

It should be borne in mind that, though credits alloyved on account 717
ot insolvency or absconding release the collector from the obligation
created by his receipt for the amount credited, the obligation to pay
still remains upon the parties assessed. Collectors should therefore
keep a record (No. 23) of all taxes thus credited and of the persons
ifrom whom they are due, and should enforce payment whenever it is
in their power to do so.

If a tax reported as uncollectible on account of the insolvency or 713
absconding of the party owing it is paid after credit has been given
for it, it should be returned upon Form 58.

PSEFARATIOH OF CLAIUS FOB CREDIT FOR TAXES AST) ASSESSED
PENALTIES ALLEGED TO BE mCOLLEGTIBLE.

FoKM 53.

" Art. 249. When a tax is found to be uncollectible the collector 7I9
or deputy collector who made the demand for payment and is con-
Tersant with the facts should prepare a claim on Form 53, showing
the name and address of the party assessed, the article or occupation
for and on account of which the assessment T^as made, the list, page,
and line on which assessed, the amount claimed, the date of first
demand, and the date when the tax was found to be uncollectible, and
the cause of inability to collect. The amount or amounts claimed
should be entered on the Form 53 under the respective column in_
which it or they are charged to the collector on Form 23. One or
more claims, cqyering taxes of the same nature, may be enterecl upon
one Form 53, and in cases where a tax and a penalty are both claimed
to be uncollectible but one -entry of the name, address, etc., should
be made, but the amounts should be entered in their respective
columns.

Collectors afe required to make demand within the time prescribed 720
by law, and either to collect the taxes or prove them to be uncol-
lectible, within six weeks after the receipt of the list, unless special
reasons are furnished, such as lack of mail facilities, great extent of
territory, etc., showing why they could not be collected within that
time.

Six months are allowed from the receipt of a list in which to close 721
it. up, either by collection or by presenting claims for abatement; but
when an abatement of taxes alleged to be uncollectible is asked, it
must be shown in the vouchers, by dates, or otherwise, that they could
not liave been collected at the time they first became due and payable
according to law, nor at any time since. Where- dates can not be

124 INCOME TAX.

given, it should appear in each case that they were uncollectible be-
fore distraint was or could have been made.

722 When it happens that a tax has been paid for which a claim on
Form 53 has been filed and is pending, the collector should at once
notify the department of such payment.

723 When the claims have been thus prepared they should.be carefully
sealed up and mailed to the Commissioner of Internal Revenue,
marked " Income Tax Division." Letters of transmittal should not
be sent with claims unless they contain necessary explanations.

724 The Form 53 should show w-hen the tax first became due; whether
the taxpayer had any property liable to distraint at that time or
thereafter ; and whether the collector used due diligence at all times
to collect the tax.

725 It is the duty of the collector to use the same diligence to collect a
tax after it has been abated as uncollectible, or as in suit, as before
abatement. Such an abatement does not impair the claim of the
Government against the taxpayer.

TAXES THAT AEE OR HAVE BEEN IN LITIGATION.

726 Art. 250. No suit will be brought for the recovery of unpaid
internal-revenue taxes until the collector of the district shall have
submitted to the Commissioner of Internal Revenue a full report
of all material facts and circumstances with the case, and shall have
received from him express authority to report the case to the United
States attorney for suit.

727 Art. 251. Amounts collected by distraint or otherwise, subsequent
to the institution of the suit, should be at once reported to the United
States attorney for his guidance in his further prosecution of the case
in court.

728 Art. 252. Credit given the collector for taxes abated as uncollectible
will not affect a suit pending for their recovery, nor will it. relieve
the collector from the duty of distraining any property of the tax-
payer that may be found at anj-^ time before judgment.

729 Art. 253. When a suit for the recovery of a tax is decided in favor
of the United States, and execution issued and returned nulla iona,
as respects the whole or a part of the judgment, the collector should
satisfy himself by careful inquiry, whether any personal property
can be found to satisfy the judgment in whole or in part, and
whether there is any real estate which can be subjected, by distrainli
or by suit in equity, under section 3207, Revised Statutes of the
United States, to sale in satisfaction of the judgment; and if he
should be fully satisfied that there is no such real or personal prop-
erty, he should thereupon present to the Commissioner of Internal
Revenue a claim, on Form 53, for the abatement of the" amount

INCOME TAX, 125

which has not been and can not be collected, if it, has not already been
abated, making a statement thereon of his action, accompanied by a
certificate of the clerk of the court as to the facts in the case.
, Art. 254. When a suit for taxes not abated as uncollectible is dis- 730
missed upon a technical defeat in the proceedings, or when an ad-
verse verdict is rendered on some technical ground not reaching the
merits of the case, and the right to a new trial or to an appeal has
lapsed, and the tax can not be collected by distraint or by suit in
equity to subject real estate to sale, the claim for abatement of the
taxes should be made on Form 53.

Art. 255. Collectors are authorized to pay the clerk of the court 731
his legal fees for the certificates required by the regulations of this
department furnished by him relative to litigated taxes, and will be
credited in their expense accounts for the amounts so paid on filing
therewith vouchers covering the expenses thus incurred. (See Eegs.
No. 2, p. 84.)

Art. 256. Where land is sold to satisfy assessments the amount 732
realized, after deducting expenses of sale, should be credited to the
lists, and the remainder, if uncollectible, claimed on Form 53. If
knd is bid in by the collector for the United States, the amount for
which the same is purchased, after deducting expenses of sale, should
ba credited to the assessments under the limitations prescribed in
Eegulations No. 2, revised, and the remainder, if uncollectible,
9laimed on Form 53.

PREPARATION OF ClAIMS FOR TEE ABATEMENT OF TAZES AND PENAL-
TIES ALLEGED TO HAVE BEEN. ERRONEOUSLY OR ILLEGALLY ASSESSED
OR TO BE ABATABLE UNDER REMEDIAL ACTS.

Art. 257. Section 3220. — The Commissioner of Internal Revenue, 733
subject to regulations prescribed by the Secretary of the Treasury,
is authorized, on appeal to him made, to remit, refund, and pay
back all taxes erroneously or illegally assessed or collected, all pen-
alties collected without authority, and aU taxes that appear to be
unjustly assessed or excessive in amount, or in any manner wrong-
fully collected; also to repay to any collector or deputy collector the
full amount of such sums of money as may be recovered against
him in any court, for any internal taxes collected by him, with the
cost and expenses of suit; also all damages and costs recovered
against any assessor, assistant assessor, collector, deputy collector,
er inspector, in any suit brought against him by reason of anything
done in the due performance of his official diity: Pfovided, That
where a second assessment is made in case of a list, statement, or
return which in the opinion of the collector or deputy collector was

126 INCOME TAX.

false or fraudulent, or contained any understatement or undervalu-
ation, such assessment shall not be remitted, nor shall taxes collected'
under such assessment be refunded, or paid back, unless it is proved
that said list, statement, or return was not false or fraudulent, and
did not contain any understatement or undervaluation.

Form 47.

734 Art. 258. Claims for the abatement of taxes or penalties errone
ously or illegally assessed or which are abatable under remedial acts,
etc., must be made out upon Form 47, and must be sustained by the
affidavits of the parties against whom the taxes were assessed, or
of other parties cognizant of the facts, and must be accompanied by
affidavits of the deputy collectors of the divisions in which the claims

^ arise.

735 But if the deputy collector has reason to doubt the correctness of
the statements made by a claimant he should modify his affidavit
accordingly, a space being left for that purpose at the close of the
affidavit. If he has not investigated all the facts he should state in
the blank space left in the body of the affidavit for that purpose what
facts he has not investigated.

736 If there are any objections to a claim, the collector should be care-
ful to state them fully in a certificate to be attached to and' made
part of the claim. In some cases, where the collector has certified to
the correctness of claims, the deputy collector makes exceptions to the
facts as stated by the claimants. Unless the collector makes a special
explanation in every such case, the claim will be returned for such
explanation.

737 The claim should be still further supported by a certificate of the
collector showing the list, page, and line of all assessments therein
referred to, not only of the assessment of the tax for the abatement
of which the claim is filed, but also of each and every other assess-
ment mentioned in the claim. Even where only a portion of a tax
is claimed as erroneous, the collector should be careful to certify the
full amount assessed.

738 When a tax has been assessed and turned over to the collector,
the presumption is that the assessment is correct. The burden of
proof in rebutting that presumption, and showing that it was im-
properly or illegally assessed, or that relief should be given under a
remedial statute, rests upon the applicant for abatement. The affi-
davits must, therefore, contain full and explicit statements of all the
material facts relating to the claims in support of which they are
offered, and which are essential to their proper consideration. Noth-
ing should be left to mere inference, but all the facts relied upon

INCOME TAX. 127

should appear on the papers themselves. It is only the correctness
of the statement. of facts to which the deputy collector certifies, not
the legality of the claim. The legality of the claim is to be deter-
mined by the Commissioner of Internal Eevenue upon the facts pre-
sented and proved by the affidavits.

When a case is compromised, in which an assessment is involved, 739
the amount paid as tax should be credited to the list. The amount,
if any, remaining outstanding, should be claimed for abatement on
Form 47, if the terms of the compromise so require.

Art. 259. Claims on Foriu 47 for abatement of errors in assess- 740
ment made in the collector's office, which errors are not corrected by
the filing of Form 488, should be executed by the collector, but
briefed in the name of the taxpayer against whom the assessment
was made.

ALIOWASCE FOa CEEDIT OF TAXES ABATED.

When claims for the abatement of taxes, either as uncollectjble or 741
erroneous, are allowed in the office of the Commissioner of Internal
Eevenue, schedule Form 7220 for abatement is drawn for the aggre-
gate of so much as is abated upon each claim named in the schedule.
The schedule issent directly to the collector of internal revenue to
whom the taxes are charged, and is his authority for taking credit
on Form 51 B and his quarterly account. Form 79, for taxes abated.
No credit for abatements shall be taken except upon schedule Form
7^20 from the Commissioner of Internal Revenue. Orders for abate-
ment are sent to the Auditor for the Treasury Department.

Art. 260. If a collector should discover from the schedule of 742
abated taxes that a mistake has occurred, either in having abated a
larger amount than that claimed, or in abating a tax which has been
previously abated, he should immediately notify the commissioner of
the fact, so that the order may be recalled, and the error be cor-
rected by the issuing of a new one in its place. In such a case no
credit, for any amount whatever, should be taken upon Form 51 B,
or upon the quarterly account until the order of abatement and
schedule have been corrected.

PIIING OF A CLAIM FOR ABATEMENT DOES NOT OPEEATE AS A DEIAY

OF COLLECTION.

Art. 261. The filing of a claim for the abatement of a tax alleged "'^^
to have been erroneously assessed does not necessarily operate as a
suspension of the collection of the tax, or make it any less the duty of
tfce collector to exercise. due diligence to prevent the collection of the
tax'being jeopardized. He should, if necessary, collect the tax and'
leave the taxpayer to his remedy by claim on Form 46.

128 INCOME TAX.

PENALTY 0? 5 PER CENT AND INTEREST AT THE RATE OF 1 PER CENT

A MONTH.

744 Art. 262. Section 3184, Revised Statutes. — Where it is not otherwise
provided the collector shall in person or by deputy, within 10 days
after receiving any list of taxes from the Commissioner of Internal
Revenue, give notice to each person liable to pay any taxes stated
therein, to be left at his dwelling or usual place of business, or to
be sent by mail, stating the amount of such taxes and demanding
payment thereof. If such person does not pay the taxes within 10
days after the service or the sending by mail of such notice it shall
be the duty of the collector or his deputy to collect the said taxes,
with a penalty of 5 per cent additional upoil the amount of taxes
and interest at the rate of 1 per centum a month.

745 Art. 263. "When an assessment is made for a tax or penalty and
demand made for payment, if a claim for abatement (Form 47) is
filed within 10 days after such demand and accepted by the col-
lector, the amount of the 5 per cent penalty on the tax claimed will
wait on the determination of the claim. Upon receipt of the notice
of rejection of the claim (or so much thereof as shall not be allowed)
the collector should immediately notify the party assessed and de-
mand the payment of the tax ; if the tax is not then paid within 10
days after mailing of the notice to the claimant by the collector of
the rejection of the claim, the 5 per cent penalty acc7ntes on the
amount not allowed. If entire amount of assessment is not de-
manded in claim for abatement and balance of tax is not paid within
the required 10 days, the 5 per cent penalty accrues on the balance
not claimed. Interest at 1 per cent per month continues to run and
should be collected with the tax at the time of payment for the f uU
number of calendar months which intervene between the date of the
expiration of the first 10 days' notice and the date of the payment of
the tax, notwithstanding the fact that a claim for abatement has
been filed.

DTJPIICATE CHARGES.

Y^g Art. 264. Taxes erroneously or illegally assessed are by the Com-
missioner of Internal Revenue abated to the taxpayer, while taxes
uncollectible are simply abated by the commissioner to the collector
against whom they are charged; but amounts which by error or
otherwise have been twice charged to a collector, are held by the
accounting officers to be matters of account, aiid not subjects for
abatement.

747 The collectors shall use Form 488 to adjust the errors in income-
tax matters held to be matters of accoimt and not subjects for abate-
ment, and forward the completed form to the Commissioner of In-
ternal Revenue, marked " Income Tax Division."

INCOME TAX, 129

See Regulations Na 2, article 41, pages 47 and 48, for further in- 748
formation to collectors as to entries to be made in records and
accounts.

PREPARATION OF CLAIMS FOR THE REFUNDING OF TAXES AND PENAL-
TIES CLAIMED TO HAVE BEEN ERRONEOUSLY OR ILLEGALLY COL-
LECTED, OR REFUNDABLE UNDER REMEDIAL STATUTES.

FOEM 46.

Art. 265. Claims for the refunding of assessed taxes and penalties 749
must be ma;de out upon Form 46. In this case, as in that of claims
for abatement upon Form 47, the burden of proof rests upon the
claimant. All the facts relied upon in support of the claim should
be clearly set forth under oath. The claim should be still further
supported by an affidavit of the deputy collector of the proper divi-
sion, and by the certificate of the collector, showing the list, page
and line upon which the assessment appears, the amount of the tax,
and the date of payment thereof .

Collectors and deputy collectors are cautioned that these certif,- 750
cates and affidavits should not he made in a merely perfunctory
manner. Claims have ieen received at the o'ffice of the Commissioner
of Internal Revenue wherein the statements of the claimant have
ieen certified hy the collector and deputy collector as " in all re-
spects just and true^'' whereas a slight examination of the records of
their own offices would have disclosed an entirely different state
of facts.

Art. 266. A claim for refunding should be made in the name of the 751
party assessed, if living ; if he is dead, the claim should be made in the
name of the executor or administrator. Certified copies of the let-
ters of administration or letters testamentary, or other similar evi-
dence, should be annexed to the claim to show that the claimant is
administrator, etc.

The affidavit may be made by an agent of the party assessed ; but, 752
in such a case, a power of attorney must accompany the claim.

PAYMENT OF CLAIMS ALLOWED.

• Art. 267. Warrants in payment of claims allowed will be drawn in 753
the names of the parties entitled to the money, and shall, unless
otherwise directed, be sent by the Treasurer of the United States di-
rectly to the proper parties or their duly authorized attorneys or
agents. But if the claimants are indebticd to the United States for
't^xes, they must be paid before the warrants are delivered.

■ Attention is called to the following act, appf oved March 3, 1875 754
-(1-8 Stat. L., 481), concerning—
33272°— 18 9

130 INCOME TAX.

DEDTTCTIOKS OF AMOUNTS DTTE BY CLAIMANTS, ETC.

Y55 Art. 2G8. Se it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled, That when any final judg-
ment recovesed against the United States or other claim, duly allowed by legal
authority, shall be presented to the Secretary of the Treasury for payment, and
the plaintiff (/f claimant therein shall be indebted to the United States in any
manner, whether as principal or surety, it shall be the duty of the Secretary
to withhold payment of an amount of such judgment or claim equal to the
debt thus due to the United States; and if such plaintiff or claimant assenta
to such set-off, and discharges his judgment or an amount thereof equal to said
debt or claim, the Secretary shall execute a discharge of the debt due from
the plaintiff to the United States. But If such plaintiff denies his indebtedness
to the United States, or refuses to consent to tjie set-off, then the Secretary shall
withhold payment of such further amount of such judgment, or claim, as in
his opinion will be sufficient to cover all legal charges and costs in prosecuting
the debt of the United States to final judgment. And If such deht is not
already in suit, it shall be the duty of the Secretary t6 cause legal proceedings
to be Immediately commenced to enforce the same, and to cause the same to
be prosecuted to final judgment with all reasonable dispatch. And if in such
action judgment shall be rendered against the United States, or the amount
recovered for debt and costs shall be less than the amount so withheld as be-
fore provided, the balance shall then be paid over to such plaintiff by such
Secretary, with six per centum interest thereon, for the time it has been with-
held from the plaintiff.

Statutes of Liiiitation.

756 Art. 269. Sec. 3228 (Kev. Stat, U. S.).— All claims for the refunding of any
Internal tax alleged to have been erroneously or illegally assessed or collected,
or of any penalty alleged to have been collected without authority, or of any
sum alleged to have been excessive or In any manner wrongfully collected,
must be presented to the Commissioner of Internal Revenue within two years
next after the cause of action accrued: Provided, That claims which accrued
prior to June six, eighteen hundred and seventy-two, may be presented to the
- commissioner at any time within one year from said date. But nothing la
this section shall be construed to revive any right of action which was already
Barred by any statute on that date.

ra? .Section 14 (a), act of September ,8, 1916, provides that upon the
examination of any return of income made pursuant to the act of
August 5, 1909, levying an excise tax, and the acts of October 3,
1913, September 8, 1916 (and same act as amended Oct. 3, 1917),
and the act of October 3, 1917, levying an income tax, " and for other
purposes," if it shall appear that amounts of tax have been paid in
excess of those properly due, the taxpayer shall be permitted to
present a claim for refund thereof notwithstanding the provisions
of section 3228 of the Revised Statutes.

758 Art. 270. The lodging of an appeal (claim for refund) made out
in due form with the proper collector of internal revenue, for the
purpose of transmission to the Commissioner of Internal Eevenue in
the usual oourse of business under the requirements of the regulsl-

IITCOMK TAX. 131

tions of the Secretary of the Treasury, is in legal effect a presenta-
tion of the appeal to the commissioner. (14 Otto, 728; 28 Int. Kev.
Sec, 87.)

. Art. 271. All claims for the refunding of taxes should be received 759
by the collector and forwarded to the Commissioner of Internal
Eevenue. In no case should the collector refuse to forward a claim
for the reason that it was not presented to him within two years after
payment of tax.

Art. 272. The collector should keep a perfect record, in the book 760
furnished for the purpose, of all claims presented to the commis-
sioner, and must certify as to each claim whether it has been before
presented or not.

, Art. 273. If any claim on form 46 or 47 is presented without the 761
aflSdavit of the deputy collector, the reason for the omission must be
given.

If in any case, after a full investigation, the collector can not cer- 762
tify to the facts set forth in the affidavits, he should state the reason
for his dissent, and allow the party to corroborate his statements
by such other proof as he may be able to furnish.

•- All amendments in the statement of facts in claims must be made7Q3
under oath.

All copies should be certified to be true ones. 764

Care should be taken to certify, in every instance where a previous 765
claim has been presented in the same «ase, the date of the previous
claim.

, "When an affidavit is made upon form 46 by some other party than 766
the one against whom the tax was assessed, the name of the party
assessed should appear upon the outside of that form.

When a firm is the claimant the claim should be in the name of the 767
firm ; but a member of the firm or authorized agent or attorney should
swear to the facts set forth, including that of membership or agency,
and should subscribe his individual name. The artificial person, to
wit, the firm, can not make oath.

In claims for abatement or refunding the collector will in all cases 768
insert in his certificate the full amount of the assessment, and not
simply the amount claimed.

\ When the collector has twice collected the tax upon the same 769
assessment he wilL charge himself with the duplicate payment on
form 58 ; and when a claim is nlade he will state in his certificate,
upon form 46, that he has so charged himself with said amount, stat-
ing the month, list, page, line, amount, and date of payment.

When a claim for refunding is made on the ground of a duplicate 770
assessment and payment, the collector will certify to the duplicate
assessment and payment on form 46, giving the full amount both of

132 INCOME TAX.

the assessment and of the payment, and will also give the page, list,,
and line in each case.

771 Many of the rules for the preparation of claims upon form 47
are equally applicable to the preparation of those upon form 46.
They should be followed wherever they are not manifestly inappli-
cable,

ClAIMS FOE, SUMS RECOVERED BY S^IT.

772 Art. 274. Claims for sums of money recovered by suit for any of
the causes, and against any of the oiRcers, enumerated in section 3220,
Revised Statutes, should be made upon form 46. The claimant
should state the grounds of his claim under oath, giving the names of
all the parties to the suit, the cause of actiorf, date of its commence-
ment, the date of the judgment, court in which it was recovered, and
its amount. To this affidavit there should be annexed a duly certified
copy of the record of the court in the case, copy of the final judg-
ment, certificate of probable cause, and itemized bill of costs paid
receipted by the clerk or other proper offcer of the court.

773 Art. 275. Section 989, Revised Statutes. — When a recovery is had in
any suit or proceeding against a collector or other officer of the
revenue for any act done by him, or for the recovery of any money
exacted by or paid to him, and by him. paid into the Treasury, in
the performance of his official duty, and the court certifies that
there was probable cause foB»the act done by the collector or other
officer, or that he acted under the directions of the Secretary of the
Treasury, or other proper officer of the Government, no execution
shall issue against such collector or other officer; but the amount
so recovered shall, upon final judgment, be provided for and paid
out of the proper appropriation from the Treasury. i

774 In view of the foregoing provisions protecting the collector from
personal liability in case the court certifies that there was probable
cause for the act done by him, it will be observed that it is for the
interest of the collector to see that in all cases where judgmenf^s
rendered against him the court shall, be asked to give the certifi"
c ate of probable cause.

775 If the judgment debtor shall have already paid the amount re-
covered against him, the claim should be made in his name, and the
sffidavit should state the exact anfount paid by him. There should
ilso be a certificate of the clerk of the court in which the judgment
\'as recovered (or other satisfactory evidence), showing that the
judgment has been satisfied, and specifying the exact sum paid in
its satisfaction, with a detail of all items of cost paid, or for which
the judgment debtor is liable.

APPENDIX.

INCOME TAX ACTS.

Income tax act of September 8, 1916, as amended by act of October &,
1917, and war income tax act of October 3, 1917, effective October
4, 1917, except as otherwise provided.

[Public No. 271, 64th Congress— H, B. 16763.1

AN ACT To increase the revenue, and for other purposes.

TITLE I.— INCOME TAX.

•- Part I. — On Individuals.

Sec. 1. (a) That there shall be levied, assessed, collected, and paid
annually upon the entire net income received in the preceding calen-
dar year from all sources by every individual, a citizen or resident of
the United States, a tax of two per centum upon such income ; and a
like tax shall be levied, assessed, collected, and paid annually upon the
entire net income received in the preceding calendar year from all
sources within the United States by every individual, a nonresident
alien, including interest on bonds, notes, or other 'interest-bearing
obligations of residents, corporate or otherwise.
' ' (b) In addition to the income tax imposed by subdivision (a) of
this section (herein referred to as the itormal tax) there shall be
levied, assessed, collected, and paid upon the total net income of every
individual, or, in the case of a nonresident alien, the total net income
received from all sources within the United States, an additional
income tax (herein referred to as the additional tax) of one per
centum per annum upon the amount by which such total net income
exceeds $20,000 and does not exceed $40,000, two per centum per
annum upon the amount by which such total net income exceeds
$40,000 and does not exceed $60,000, three per centum per annum
upon the amount by which such total net income exceeds $60,000 and
does not exceed $80,000, four per centum per annum upon the amount
by which such total net income exceeds $80,000 and does not exceed
'$100,000, five per centum per annum upon the amount by which sych
total net income exceeds $100,000 and does not exceed $150,000,. six
per centum per annum upon the amount by which such total net

134 INCOMr-, TAX.

income exceeds $luO,000 and does not exceed $200,000, seven per
centum per annum upon the amount by which such total net income
exceeds $200,000 and does not exceed $250,000, eight per centum per
annum upon the amount by which such total net income exceeds
$250,000 and does not exceed $300,000, nine per centum per annum
upon the amount by which such total net income exceeds $300,000 and
dees not exceed $500,000, ten per centum per annum upon the amount
by which such total net income exceeds $500,000 and does not exceed
$1,000,000, eleven per centum per annum upon the amount by which
such total net income exceeds $1,000,000 and does not exceed $1,*
500,000, twelve per centum per annum upon the amount by which
such total net income exceeds $1,500,000 and does not exceed $2,-
000,000, and thirteen per centum per annum upon the amount by
which such total net income exceeds $2,000,000.

For the purpose of the additional tax there shall be included as
income the income derived from dividends on the capital stock or
from the net earnings of any corporation, joint-stock company or
association, or insurance company, except that in the case of non-
resident aliens such income derived from sources without the United
States shall not be included.

All the provisions of this title relating to the normal tax on individ-
uals, so far as they are applicable and are not inconsistent Avith this
subdivision and section three, shall apply to the imposition, levyj
assessment, and collection of the additional tax imposed under this
subdivision.

(c) The foregoing normal and additional tax rates shall apply to
the entire net income, except as hereinafter provided, received by
every taxable person in the calendar year nineteen hundred and six-
teen and in each calendar year thereafter.

INCOME DEFINED.

Sec. 2. (a) That, subject only to such exemptions and deductions
as are hereinafter allowed, the net income of a taxable person shall
include gains, profits, and income derived from salaries, wages, or
compensation for personal service of whatever kind and in whatever
form paid, or from professions, vocations, businesses, trade, com-
merce, or sales, or dealings in property, whether real or personal,
growing out of the ownership or use of or interest in real or -personal
property, also from interest, rent, dividends, securities, or the transac-
tion of any business carried on for gain, or profit, or gains or profits
and income derived from any source whatever.

(b) Income received by estates of deceased persons during the
period of administration or settlement of the estate, shall be subject
to the normal and additional tax and taxed to their estates, and also

I-NCOME TAX. 135

such income of estates or any kind of property held in trust, includ-
ing such income accumulated in trust for the benefit of unborn or
tmascertained persons, or persons with contingent interests, and in-
come held for future distribution under the terms of the -will or
trust shall be likewise taxed, the tax in each instance, except Avhen the
income is returned for the purpose of the tax by the beneficiary, to
be assessed to the executor, administrator, or trustee, as the case may
be: Provided, That where the income is to be distributed annually
or regularly between existing heirs or legatees, or beneficiaries the
rate of tax and method of computing the same shall be based in each
case upon the amount of the individual share to be distributed.

Such trustees, executors, administrators, and other fiduciaries are
hereby indemnified against the claims or demands of every beneficiary
for all payments of taxes which they shall be required to make under
the provisions of this title, and they shall have credit for the amount
of such payments against the beneficiary or principle in any account-
ing which they make as such trustees or other fiduciaries.

(c) For the purpose of ascertaining the gain derived from the sale
or other disposition of property, real, personal, or mixed, acquired
before March first, nineteen hundred and thirteen, the fair market
price or value of such property as of March first, nineteen hundred
and thirteen, shall be the basis for determining the amount of such
gain derived.

ADDITIONAL TAX INCLtJDES UNDISTRIBUTED PROFITS.

. Sec. 3. For the purpose of the additional tax, the taxable income
pf any individual shall include the share to which he would be en-
titled of the gains and profits, if divided or distributed, whether di-
vided or distributed or not, of all corporations, joint-stock compa-
nies or associations, or insurance companies, however created or or-
ganized, formed or fraudulently availed of for the purpose of pre-
venting the imposition of such tax through the medium of permit-
ting such gains and profits to accumulate instead of being divided
or distributed; and the fact that any such corporation, joint-stock
company or association, or insurance company, is a mere holding
company, or that the gains and profits are permitted to accumulate
beyond the reasonable needs of the business, shall be prima facie evi-
dence of a fraudulent purpose to escape such tax; but the fact that
the gains and profits are in any case permitted to accumulate and
become surplus shall not be construed as evidence of a purpose to
escape the said tax in such case unless the Secretary of the Treasury
shall certify that in his opinion such accumulation is unreasonable
for. the pui*poses of the business. When requested, by the Gommis-
"sioiier of Internal Eevenue, or any district collector of internal rev-
enuei such corporation, joint-stock company or association, or insur-

ance company sh^U forward fco him a correct statement of such gains
and profits and the names and addresses of the individuals or sliare-
holders who would be entitled to the same if divided or distributed,

INCOME EXE3IPT FEOM LAW.

Sec. 4. The following income shall be exempt from the provisions
of this title : , .

The proceeds of life insurance policies paid to individual benefi-,
ciaries upon the death of the insured; the amount received by the
insured, as a return of premium or premiums paid by him imder life
insurance, endowment, or annuity contracts, either during the term
or at the maturity of the term mentioned in the contract or upon
surrender of the contract; the value of property acquired by gift,
bequest, devise, or descent (but the income from such property shall
be included as income) ; interest upon the obligations of a State
or any political subdivision thereof or upon the obligations of the
United States (but, in the case of obligations of the United States
issued after September first, nineteen hundred and seventeen, only
if and to the extent provided in the Act authorizing the issue there-
of)^ or its possessions or securities issued under the provisions of
the Federal Farm Loan Act of July seventeenth, nineteen hundred
and sixteen ; the compensation of the present President of the United
States during the term for which he has been elected and the judges
of the supreme and inferior courts of the United States now in office,
and the compensation of all officers and employees of a State, or any
political subdivision thereof, except when such compensation is paid
by the United States Government.

■ DEDUCTIONS ALLOWED.

Sec. 5. That in computing net income in the case of a citizen ob
resident of the United States —

(a) For the purpose of the tax there shall be allowed as deduct
tions —

First. The necessary expenses actually paid in carrying on any
business or trade, not including personal, living, or family expenses!

iPubUc No. 43, 65th Congress (H. E. 5901) An Act to authorize an additional Issue of
bonds to meet expenditures for the national security and defense, and for other purposes.--
Approved Sept. 24, 1917.

Sec. 7. That none of the bonds authorized by section one, nor of the certificates au-
thorized by section five, or by section six, of this Act, shall bear the circulation privilegfe
All such bonds and certificates shall be exempt, both as to principal and Interest from
all taxation now or hereafter imposed by the United States, any State, or any of the
possessions of the United States, or by any local taxing authority, except (a) estate or
inheritance taxes, and (b) graduated additional income taxes, commonly known as sur-
taxes, and excess profits and war-proflts taxes, now or hereafter Imposed by the United
States, upon the Income or profits of indlylduals, partnerships, associations, or corpotft-
tions. The interest on an amount of such bonds and certificates the principal of which
does not exceed in the aggregate (5,000, owned by any Indiyidual, partnership, associatloOi
or corporation, «7ia)Z be exempt from the taxes provided for in subdivision (b) of thla
Bectlon.

INCOME TAX, 137

Second. All interest paid within the year on his indebtedness
except on indebtedness incurred for the purchase of obligations or
securities the interest upon which is exempt ff om taxation as income
under this title ;

Third. Taxes paid within the year imposed by the authority of the
United States (except income and excess profits taxes) or of its Ter-
ritories, or possessions, or any foreign country, or by the authority
of any State, county, school district, or municipality, or other taxing
subdivision of any State, not including those assessed against local-
benefits ;

Fourth. Losses actually sustained during the year, incurred in his
business or trade, or arising from fires, storms, shipwreck, or other
casualty, and from theft, when such losses are not compensated for
by insurance or otherwise : Provided^ That for the purpose of ascer-
taining the loss sustained from the sale or other disposition of prop-
erty, real, personal, or mixed, acquired before March first, nineteen
hundred and thirteen, the fair market price or value of such prop-
erty as of March first, nineteen hundred and thirteen, shall be the
basis for determining the amount of such loss sustained ;

Fifth. In transactions entered into for profit but not connected
with his business or trade, the losses actually sustained therein dur-
ing the year to an amount not exceeding the profits arising there-
. from;

Sixth. Debts due to the taxpayer actually ascertained to be worth-
less and charged off within the year ;

Seventh. A reasonable allowance for the exhaustion, wear and tear
of property arising out of its use or employment in the business or
trade ;

Eighth, (a) In the case of oil and gas wells a reasonable allowance
for actual reduction in flow and production to be ascertained not by
the flush flow, but by the settled production or regular flow; (b) in
the case of mines a reasonable allowance for depletion thereof not
to exceed the market value in the mino of the product thereof, which
has been mined and sold during the year for which the return and
computation are made, such reasonable allowance to be made in the
case of both (a) and (b) under rules and regulations to be prescribed
by the Secretary of the Treasury: Provided^ That when the allow-
ances authorized (a) and (b) shall equal the capital originally in-
¥ested, or in case of purchase made prior to March first, nineteen
hundred and thirteen, the fair market value as of that date, no
further allowance shall be made. No deduction shall be allowed for
any amount paid out for new buildings, permanent improvements,
or, betterments, made to increase the value of any property or estate,
and no deduction shall be made for any amount of expense of re-

138 INCOME TAX.

storing property or making good the exhaustion thereof for which
an allowance is or has been made.

Ninth. Contributions or gifts r.ctually made within the year to cor-
porations or associations organized and operated exclusively for re-
ligious, charitable, scientific, or educational purposes, or to societies
for the prevention of cruelty to children or animals, no part of the
net income of which inures to the tenofit of any private stockholder
or individual, to an amount not in excess of fifteen per centum of the
taxpayer's taxable net income as computed without the benefit of this
paragraph. Such contributions or gifts shall be allowable as deduc-
tions only if verified under rules and regulations prescribed by the
Commissioner of Internal Eevenue, with the j^pproval of the Secre-
tary of the Treasury.

CREDITS ALLOWED.

(b) For the purpose of the normal tax only, the income embraced
in a personal return shall be credited with the amount received as
dividends upon the stock or from the net earnings of any corjDoration,
.joint-stock company or association, trustee, or insurance company,
which is taxable upon its net income as hereinafter provided ;

(c) A like credit shall be allowed as to the amount of income,
the normal tax upon which has been paid or withheld for payment
at the source of the income under the provisions of this title.

KONEESIDENT ALIENS.

Sec. 6. That in computing net income in the case of a nonresident
alien —

(a) For the purpose of the tax there shall be allowed as deduc-
tions —

First. The necessary expenses actually paid in carrying on any
business or trade conducted by him within the United States, not
including personal, living, or family expenses ;

Second. The proportion of all interest paid within the year by such
person on his indebtedness (except on indebtedness incurred for the
purchase of obligations or securities the interest upon which is ex-
empt from taxation as income under this title) which the gross
amount of his income for the year derived from sources within the
United States bears to the gross amount of his income for the year
derived from all sources within and without the United States, but
this deduction shall be allowed only if such person includes in the
return required by section eight all the information necessary for its
calculation ;

^ Third. Taxes paid within the year imposedljy the authority of the
United States (except income and excess profits taxes) or of its
Territories, or possessions, or by the authority of any State, county,

INCOME TAX. 139

sch&ol district, or municipality, or other taxing subdivision of any-
State, paid within the United States, not inckiding those assessed
against local benefits ;

Fourth. Losses actually sustained during the year, incurred in
business or trade conducted by him within the United States, and
losses of property within the United States arising from fires, storms,
shipwreck, or other casualty, and from theft, when such losses are
not compensated for by .insurance or otherwise : Provide^, That for
the purpose of ascertaining the amount of such loss or losses sus-
tained in trade, or speculative transactions not in trade, from the
same or any kind of property acquired before March first, nineteen
hundred and thirteen, the fair market price or value of such property
as of March first, nineteen hundred and thirteen, shall be the basis
for determining the amount of such loss or losses sustained ;

Fifth. In transactions entered into for profit but not connected
with his business or trade, the losses actually sustained therein dur-
ing the year to an amount not exceeding the profits arising, therefrom
in the United States ;

Sixth. Debts arising in the course of business or trade conducted
by him within the United States due to the taxpayer actually ascer-
tained to be worthless and charged off within the yen.r ;

Seventh. A reasonable allowance for the exhaustion, wear and tear
of property within the Unite'd States arising out of its use or employ-
ment in the business or trade; (a) in the case of oil and gas wells a
reasonable allowance for actual reduction in flow and production to
be ascertained not by the flush flow, but by the settled production
or regular flow; (b) in the case of mines a reasonable allowance for
depletion thereof not to exceed the market value in the mine of the
product thereof which has been mined and sold during the year for
which the return and computation are made, such reasonable allow-
ance to be made in the case of both (a) and (b) under rules and regu-
lations to be prescribed by the Secretary of the Treasury: Provided,
That when the allowance authorized in (a) and (b) shall equal the
capital originally invested, or in case of purchase made prior to
March first, nineteen hundred and thirteen, the fair market value
as of that date, no further allowance shall be made- No deduction
shall be allowed for any amount paid out for new buildings, perma-
nent improvements, or betterments, made to increase the value of
any property or estate, and no deduction shall be made for any
amount of expense of restoring property or making good the exhaus-
tion thereof for which an allowance is or has been made.

(b) There shall also be allowed the credits specified by subdivi-
sions (b) and (c) of section five.

(c) A nonresident alien individual shall receive the benefit of the
deductions and credits provided for in this section only by filing or

140 INCOME TAX.

causing to be filed with the collector of internal revenue a true and
accurate return of his total income, received from all sources, cor-
porate or otherwise, in the United States, in the manner prescribed
by this title ; and in case of his failure to file such return the collector
shall collect the tax on such income, and all property belonging to
such nonresident alien individual shall be liable to distraint for
the tax.

PERSONAL EXEMPTION.

Sec. 7. That for the purpose of the normal tax only, there shall be
allowed as an exemption in the nature of a deduction from the
amount of the net income of each citizeii or resident of the United
States, ascertained as provided herein, the sum of $3,000, plus $1,000
additional if the person making the return be a head of a family or
a married man with a wife living with him, or plus the sum of $1,000
additional if the person making the return be a married woman with
a husband living with her; but in no event shall this additional
exemption of $1,000 be deducted by both a husband and a wife: Prd^
vided, That only one deduction of $4,000 shall be made from the
aggregate income of both husband and wife when living together:
Provided further, That if the person making the return is the head
of a family there shall be an additional exemption of $200 for each
child dependent upon such person, if under eighteen years of age, or
if incapable of self-support because mentally or physically defective,
but this provision shall operate only in the case of one parent in the
same family : Provided further, That guardians or trustees shall be
allowed to make this personal exemption as to income derived from
the property of which such guardian or trustee has charge in favor
of each ward or cestui que trust : Provided further, That in no event
shall a ward or cestui que trust be allowed a greater personal exemp-
tion than as provided in this section, from the amount of net income
received from all sources. There shall also be allowed an exemption
from the amount of the net income of estates of deceased citizens or
residents of the United States during the period of administration or
settlement, and of trust or other estates of citizens or residents of the
United States the income of which is not distributed annually or
regularly under the provisions of subdivision (b) of section two, the
sum of $3,000, including such deductions as are allowed imder section
five.

(b) [Kepealed.]

RETURNS.

Sec. 8, (a) The tax shall be computed upon the net income, as thus
ascertained, of each person subject thereto, received in each preced--
ing calendar year ending December thirty-first.

INCOME TAX. 141

(b) On or before the first day of March, nineteen hundred and
renteen, and the first day of March in each year thereafter, a true
d accurate return under oath shall be made by each person of
ivful age, except as hereinafter provided, having a net income of
,000 or over for the taxable year to the collector of internal revenue
r t]ie district in which such person has his legal residence or princi-
,1 place of business, or if there be no legal residence or place of
Lsiness in the United States, then with the collector of internal
venue at Baltimore, Maryland, in such form as the Commissioner

Internal Revenue, with the approval of the Secretary of the
reasury, shall prescribe, setting forth specifically the gross amount

income from all separate sources, and from the total thereof
sducting the aggregate items of allowances herein authorized:
mvided, That the Commissioner of Internal Revenue shall have
ithority to grant a reasonable extension of time, in meritorious
,ses, for filing returns of income by persons residing or traveling
)road who are required to make and file returns of income and who
•e unable to file said returns on or before March first of each year :
rovided further. That the aforesaid return may be made by an
^nt when by reason of illness, absence, or nonresidence the person
able for said return is unable to make and render the same, the
^ent assuming the responsibility oi making the return and incurring
jnalties provided for erroneous, false, or fraudulent return.

(c) Guardians, trustees, executors, administrators, receivers, con-
srvators, and all - persons, corporations, or associations, acting in
ly fiduciary capacity, shall make and render a return of the income
f the person, trust, or estate for whom or which they act, and be
ibject to all the provisions of this title which apply to individuals,
ucli fiduciary shall make oath that he has sufRcient knowledge of
le affairs of such person, trust, or estate to enable him to make such
jturn and that the same is, to the best of his knowledge and belief,
•ue and correct, and be subject to all the provisions of this title
hich apply to individuals : Provided, That, a return made by one of
vo or more joint fiduciaries filed in the district where such fiduciary
ssides, under such regulations as the Secretary of the Treasury may
rescribe, shall be a sufficient compliance with the requirements of
lis paragraph : Provided further, That no return of income not ex-
sediug $3,000 shall be required except as in this title otherwise pro-
ided.

(d) [Repealed.]

'(e) Persons carrying on business in partnership shall be liable for
iconie tax only in their individual capacity, and the share of the
rofits of the partnership to which any taxable partner would be en-
■tled if the same were divided, whether divided or otherwise, shall
B returned for taxation and the tax paid under the provisions of

142 INCOME TAX.

this title : Provided^ That from the net distributive interests on which
the individual members shall be liable for tax, normal and additional,
there shall be excluded their proportionate shares received from
interests on the obligations of a State or any political or taxing sub-
division thereof, and upon the obligations of the United States (if
and to the extent that it is provided in the Act authorizing the issue
of such obligations of the United States that they are exempt from
taxation), and its possessions, and that for the purpose of computing
the normal tax there shall be allowed a credit, as provided by section
five, subdivision (b), for their proportionate share of the profits
derived fronri dividends. Such partnership, when requested by the
Commissioner of Internal Revenue or any district collector, shall
render a correct return of the earnings, profits, and income of the
partnership, except income exempt under section four of this
Act, setting forth the item of the gross income and the deductions and
credits allowed by this title, and the names and addresses of the
individuals who would be entitled to the net earnings, profits, and
income, if distributed. A partnership shall have the same privilege
of fixing and making returns upon the basis of its own fiscal year as
is accorded to corporations under this title. If a fiscal year ends dur-
ing nineteen hundred and sixteen or a subsequent calendar year for
which there is a rate of tax different from the rate for the pre-
ceding calendar year, then (1) the rate for such preceding calendar
year shall apply to an amount of each partner's share of such partner-
ship profits equal to the proportion which the part of such fiscal year
falling within such calendar year bears to the full fiscal year, and (2)
the rate for the calendar year during which such final year ends shall
apply to the remainder.

(f ) In every return shall be included the income derived from divi-
dends on the capital stock or from the net earnings of any corpora-
tion, joint-stock company or association, or insurance company, ex-
cept that in the case of nonresident aliens such income derived from
sources without the United States shall not be included.

(g) An individual keeping accounts upon any basis other than that
of actual receipts and disbursements, unless such other basis does not
clearly reflect his income, may, subject to regulations made by the
Commissioner of Internal Eevenue, with the approval of the Secret
tary of the Treasury, make his return upon the basis upon which his
accounts are kept, in which case the tax shall be computed upon his
income as so returned.

ASSESSMENT AND ADMINISTRATION.

Sec. 9. (a) That all assessments shall be made by the Commis-
sioner of Internal Eevenue and all persons shall be notified of t^e
amount for which they are respectively liable on or before the first 3

INCOME TAX. 143

a or before the fifteenth day of June, except; in cases of i-efusal or
Bglect to make such return and in cases of erroneous, false, or f raudu-
mt jeturns, in which cases the Commissioner of Internal Eevenue
lall, upon the discovery thereof, at any time within three years after
dd return is due, or has been made, make a return upon informa-
on obtained as provided for in this title or by existing law, or re-
uire the necessary corrections to be made, and the assessment made
y, the Commissioner of Internal Eevenue thereon shall be paid by
iich person or persons immediately upon notification of the amount
f such assessment ; and to any sum or sums due and unpaid after the
fteenth day of June in any year, and for ten days after notice and
emand thereof by the collector, there shall be added the sum of five
er centum on the amount of tax unpaid, and interest at the rate of
ne per centum per month upon said tax from the time the same be-
ame due, except from the estates of insane, deceased, or insolvent
ersons.

*

(b) All persons, corporations, partnerships, associations, and in-
urance companies, in whatever capacity acting, including lessees or
lortgagors of real or personal property, trustees acting in any trust
apacity, executors, administrators, receivers, conservators, em-
iloyerg, and all officers and employees of the United States, having
he control, receipt, custody, disposal, or payment of interest, rent,
alaries, wages, premiums, annuities, compensations, remuneration,
moluments, or other fixed or determinable annual or periodical
:ains, profits, and income of any nonresident alien individual, other
ban income derived from dividends on capital stock, or from the
et earnings of a corporation,- joint-stock company or association, or
asurance company, which is taxable upon its net income as provided
1 this title, are hereby authorized and required to deduct and with-
old from such annual or periodical' gains, profits, and income such
iim as will be sufficient to pay the normal tax imposed thereon by
bis title, and shall make return thereof on or before March first of
ach year and, on or before the time fixed by law for the payment of
de tax, shall pay the amount withheld to the officer of the United
Itates Government authorized to receive the same ; and they are each
ereby made personally liable for such tax, and they are each hereby
[idemnified against every person, corporation, partnership, associa-
ion, or insurance company, or demand whatsoever for all payments
rhioli they shall make in pursuance and by virtue of this title.

(c) The amount of the normal tax, hereinbefore imposed shall also
e deducted and withheld from fixed or determinable annual or
eriodical gains, profits and income derived from interest upon bonds
nd mortgages, or deeds of trust or other similar obligations of cor-
iorations, joint-stock companies, associations, and insurakice c6m-
lanies (if such bonds, mortgages, or other obligations contain a con-
ract or provision by which the obligor agrees to pay any portion of

144 nrooME tax.

the tnr. imposed by this title upon the obligee or to reimburse the
obligee for any portion of the tax or to pay the interest without de-
duction for any tax which the obligor may be required or permitted
to pay thereon or to retain therefrom under any law of the United
States), whether payable annually or at shorter or longer periods
and whether such interest is payable to a nonresident alien individual
or to an individual citizen or resident of the United States, subject to
the provisions of the foregoing subdivision (b) of this section re-
quiring the tax to be withheld at the source and deducted from annual
income and returned and paid to the Government, unless the person
entitled to receive such interest shall file with the withholding agent,
on or before February first, a signed notice in writing claiming the
benefit of an exemption under section seven of this title.

(d) [Eepealed.]

(e) [Eepealed.]

(f ) All persons, corporations, partnerships, or associations, under^
taking as a matter of business or for profit the collection of foreign
payments of interest or dividends by means of coupons, checks, or
bills of exchange shall obtain a license from the Commissioner of
Internal Eevenue, and shall be subject to such regulations enabling
the Government to obtain the information required under this title, as
the Commissioner of Internal Eevenue, with the approval of thia
Secretary of the Treasury, shall prescribe ; and whoever knowingly
undertakes to collect such payments as aforesaid without having ob-
tained a license therefor, or without complying with such regula-
tion?, shall be deemed guilty of a misdemeanor and for each offense
be fined in a sum not exceeding $3,000, or imprisoned for a term not
exceeding one year, or both, in the discretion of the court.

(g) The tax herein imposed upon gains, profits, and incomes not
falling under the foregoing and not returned and paid by virtue of
the foregoing or as otherwise provided by law shall be assessed by
personal return under rules and regulations to be prescribed by the
Commissioner of Internal Eevenue and approved by the Secretary
of the Treasury. The intent and purpose of this title is that all
gains, profits, and income of a taxable class, as defined by this title,
shall be charged and assessed with the corresponding tax, normal
and additional, prescribed by this title, and said tax shall be paid by
the owner of such income, or the proper representative having the
receipt, custody, control, or disposal of the same. For the purpose
of this title ownership or liability shall be determined as of the year
for which a return is required to be rendered. - ■

The provisions of this section, except subdivision (c), relating to
the deduction and pajnnent of the tax at the source of income shall
only apply to the normal tax hereinbefore imposed upon nonresident
alien individuals.

nrCOME TAX. 145

Part II. — On Coepoeations.

Sec. 10. (a) That there shall be levied, assessed, collected, and paid
annually upon the total net income received in the preceding calendar
j^ear from all sources by every corporation, joint-stock company or
association, or insurance company, organized in the United States,
M matter how created or organized, but not including partner-
ships, 'a tax of two per centum upon such income; and a like tax
shall be levied, assessed, collected, and paid annually upon the
total nat income received in the preceding calendar year from all
sources within the United States by every corporation, joint-stock
company or association, or insurance company, organized, authorized,
or existing under the laws of any foreign country, including interest
on bonds, notes, or other interest-bearing obligations of residents,
corporate or otherwise, and including the income derived from divi-
dends on capital stock or from net earnings of resident corporations,
joint-stock companies or associations, or insurance companies, whose
net income is taxable under this title.

The foregoing tax rate sliall apply to the total net income received
by every taxable corporation, joinf-stock company or association, or
insurance company in the calendar year nineteen hundred and six-
teen and in each year thereafter, except that if it has fixed its own
fiscal year under the provisions of existing law, the foregoing rate
shall apply to the proportion of the total net income returned for the
fiscal year ending prior to December thirty-first, nineteen hundred
and sixteen, which the period between January first, nineteen hun-
dred and sixteen, and the end of such fiscal year bears to the whole
of such fiscal year, and the rate fixed in Section II of the Act
approved October third, nineteen hundred and thirteen, entitled "An
A.ct to reduce tariff duties and to provide revenue for the Govern-
ment, and for other purposes," shall apply to the remaining portion
of the total net income returned for such fiscal year.

•For the purpose of ascertaining the gain derived or loss sustained
from the sale or other disposition by a corporation, joint-stock com-
pany or association, or insurance company, of property, real, per-
sonal, or mixed, acquired before March first, nineteen hundred and
;hirteen, the fair market price or value of such property as of March
irst, nineteen hundred and thirteen, shall be the basis for determining
the amount of such gain derived or loss sustained.

(b) In addition to the income tax imposed by subdivision (a) of
;his section there shall be levied, assessed, collected, and paid annu-=
illy an additional tax of ten per centum upon the amount, remaining
mdistributed six months after the end of each calendar or fiscal year,
if the total net income of every corporation, joint-stock company or
issociation, or insurance company, received during the year, as deter-
33272°— 18 10

146 INCOME TAX.

mined for the purposes of the tax imposed by such subdivision (a),
but not including the amount of any income taxes paid by it within
the year imposed by the authority of the United States. ^

The tax imposed by this subdivision shall not apply to that portion
of such undistributed net income which is actually invested and
employed in the business or is retained for employment in the reason-
able requirements of the business or is invested in obligations of the
United States issued after September first, nineteen hundred and
seventeen: Provided, That if the Secretary of the Treasury ascer-
tains and finds that any portion of such amount so retained at any
time for employment in the business is not so employed or is not
reasonably required in the business a tax of fifteen per centum shall
be levied, assessed, collected, and paid thereon.

The foregoing tax rates shall apply to the undistributed net income
received by every taxable corporation, joint-stock company or asso-
ciation, or insurance company in the calendar year nineteen hundred
and seventeen and in each year thereafter, except that if it has fixed
its own fiscal year under the provisions of existing law, the foregoing
rates shall apply to the proportion of the taxable undistributed net
income returned for the fiscal year ending prior to December thirty-
first, nineteen hundred and seventeen, which the period between Jan-
uary first, nineteen hundred and seventeen, and. the end of such
fiscal year bears to the whole of such fiscal year.

CONDITIONAL AND OTHER EXEMPTIONS.

Sec. 11. (a) That there shall not be taxed under this title any
income received by any —

First. Labor, agricultural, or horticultural organization;

Second. Mutual savings bank not having a capital stock repre-
sented by shares ;

Third. Fraternal beneficiary society, order, or association, operat-
ing under the lodge system or for the exclusive benefit of the members
of a fraternity itself operating under the lodge system, and providinjg
for the payment of life, sick, accident, or other benefits to the mem-
bers of such society, order, or association or their dependents;

Fourth. Domestic building and loan association and cooperative
banks without capital stock organized and operated for mutual pur-
poses and without profit ;

Fifth. Cemetery company owned and operated exclusively for the
benefit of its members ;

Sixth. Corporation or association organized and operated excl*
sively for religious, charitable, scientific, or educational purposes, no
part of the net income of which inures to the benefit of any private
stockholder or individual;

INCOME TAX. 147

Seventh. Business league, chamber of commerce, or hoard of trade,
not organized for profit and no part of the net income of which
inures to the benefit of any private stockholder or individual ;

Eighth. Civic league^or organization not organized for profit but
operated exclusively for the promotion of social welfare;

Ninth. Club organized and operated exclusively for pleasure, rec-
reation, and other nonprofitable purposes, no part of the net income
of which inures to the benefit of any private stockholder or member ;

Tenth. Farmers' or other mutual hail, cyclone, or fire insurance
company, mutual ditch or irrigation company, mutual or cooperative
telephone company, or like organization of a purely local character,
the income of which consists solely of assessments, dues, and fees col-
lected from members for the sole purpose of meeting its expenses ;

Eleventh. Farmers', fruit growers', or like association, organized
and operated as a sales agent for the purpose of marketing the prod-
ucts of its members and turning back to them the proceeds of sales,
less the necessary selling expenses, on the basis of the quantity of
produce furnished by them;

Twelfth. Corporation or association organized for the exclusive
purpose of holding title to property, collecting income therefrom, and
turning over the entire amount thereof, less expenses, to an organi-
zation which itself is exempt from the tax imposed by this title ; or

Thirteenth. Federal land banks and national farm-loan associa-
tions as provided in section twenty-six of the Act approved July
seventeenth, nineteen hundred and sixteen, entitled "An Act to pro-
vide capital for agricultural development, to create standard forms
of investment based upon farm mortgage, to equalize rates of inter-
est upon farm loans, to furnish a market for United States bonds,
to create Government depositaries and financial agents for the United
States, and for other purposes."

Fourteenth. Joint stock land banks as to income derived from
bonds or debentures of other joint stock land banks or any Federal
land bank belonging to such joint stock land bank.

(b) There shall not be taxed under this title any income derived
from any public utility or from the exercise of any essential govern-
mental function accruing to any State, Territory, or the District of
Columbia, or any political subdivision of a State or Territory, nor
tiny income accruing to the government of the Philippine Islands or
Porto Eico, or of any political subdivision of the Philippine Islands
sr Porto Eico : Provided, That whenever any State, Territory, or the
District of Columbia, or any political subdivision of a State or Ter-
ritory, has, prior to the passage of this title, entered in good faith
into a contract with any person or corporation, the object and pur-
[)ose of which is to acquire, construct, operate, or maintain a public
itility, no tax shall be levied under the provisions of this title upon

148 INCOME TAX.

the income derived from the operation of such public utility, so far
as the payment thereof will impose a loss or burden upon such State,
Territory, or the District of Columbia, or a political subdivision of a
State or Territory ; but this provision is not intended to confer upon
such person or corporation any financial gain or exemption or to
relieve such person or corporation from the payment of a tax as
provided for in this title upon the part or portion of the said income
to which such person or corporation shall be entitled under such
contract,

DEDUCTIONS,

Sec. 12. (a) In the case of a corporation, joint-stock company or
association, or insurance company, organized in the United States,
such net income shall be ascertained by deducting from the gross
amount of its income received within the year from all sources —

First. All the ordinary and necessary expenses paid within the
year in the maintenance and operation of its business and properties,
including rentals or other payments required to be made as a condi-
tion to the continued use or possession of property to which the cor-
poration has not taken or is not taking title, or in which it has no
equity.

Second, All losses actually sustained and charged off within the
year and not compensated by insurance or otherwise, including a rea-
sonable allowance for the exhaustion, wear and tear of property aris-
ing out of its use or employment in the business or trade; (a) in
the case of oil and gas wells a reasonable allowance for actual reduc-
tion in flow and production to be ascertained not by the flush flow,
but by the settled production or regular flow; (b) in the case of
mines a reasonable allowance for depletion thereof not to exceed the
market value in the mine of the product thereof which has been
mined and sold during the year for which the return and computa-
tion are made, such reasonable allowance to be made in the case of
both (a) and (b) under rules and regulations to be prescribed by
the Secretary of the Treasury: Provided, That when the allowance
authorized in (a) and (b) shall equal the capital originally invested,
or in case of purchase made prior to March first, nineteen hundred
and thirteen, the fair market value as of that date, no further allow-
ance shall be made; and (c) in the case of insurance companies, the
net addition, if any, required by law to be made within the year to
reserve funds and the sums other than dividends paid within the
year on policy and annuity contracts : Provided, That no deduction
shall be allowed for any amount paid out for new buildings, perma-
nent improvements, or betterments made to increase the value of apy
property or estate, and no deduction shall be made for any amount
of expense of restoring property or making good the exhaustion

INOOMR TAX. 14 9

thereof for -which an allowance is or has been made: Provided fur-
ther, That mutual fire and mutual employers' liability and mutuiil
.workmen's compensation and mutual casualty insurance companies
requiring their members to make premium deposits to provide for
losses and expenses shall not return as income any portion of the
premium deposits returned to their policyholders, but shall return as
taxable income all income receiyed by them from all other sources
plus such portions of the premium deposits as are retained by the
companies for purposes other than the payment of losses and ex-
penses and reinsurance reserves: Provided further, That mutual
marine insurance companies shall include in their return of gross in-
come gross premiums collected and received by them less amounts
paid for reinsurance, but shall be entitled to include in deductions
from gross income amounts repaid to policyholders on account of
premiums previously paid by them and interest paid upon such
amounts between the ascertainment thereof and the payment thereof,
and life insurance companies shall not include as income in any yeair
such portion of any actual premium received from any individual
policyholder as shall have been paid back or credited to such indir
vidual policyholder, or treated as an abatement of premium of such
individual policyholder, within such year ;

Third. The amount of interest paid within the year on its indebt-
edness (except on indebtedness incurred for the purchase of obliga-
tions or securities the interest upon which is exempt from taxation
as income under this title) to an amount of such indebtedness not in
excess of the sum of (a) the entire amount of the paid-up cajjital
stock outstanding at the close of the year, or, if no capital stock, the
entire amount of capital employed in the business at the close of the
year, and (b) one-half of its interest-bearing indebtedness then out-
standing: Provided, That for the purpose of this title preferred
capital stock shall not be considered interest-bearing indebtedness,
and interest or dividends paid upon this stock shall not be deductible
from gross income : Provided further, That in cases wherein shares
of capital stock are issued without par or nominal value, the amount .
of paid-up capital stock, within the meaning of this section, as rep-
resented by such shares, will be the amount of cash, or its equivalent,
paid or transferred to the corporation as a consideration for such
shares: Provided further, That in the case of indebtedness wholly
secured by property collateral, tangible or intangible, the subject of
sale or hypothecation in the ordinary business of such corporation,
joint-stock company or association as a dealer only in the property
constituting such collateral, or in loaning the funds thereby procured,
■tiie total interest paid by such corporation, company, or association
within the year on any such indebtedness may be deducted as a part
of its expenses of. doing business, but interest on such indebtedness

150 INCOME TAX.

shall only be deductible on an amount of such indebtedness not in
excess of the actual value of such property collateral : Provided fur-
ther, That in the case of bonds or other indebtedness, which have
been issued with a guaranty that the interest payable thereon shall
be free from taxation, no deduction for the payment of the tax herein
imposed, or any other tax paid pursuant to such guaranty, shall be
allowed ; and in the case of a bank, banking association, loan or trust
company, interest paid within the year on deposits or on moneys
received for investment and secured by interest-bearing certificates
of indebtedness issued by such , bank, banking association, loan or
trust company shall be deducted ;

Fourth. Taxes paid within the year imposed by the authority of
the United States (except income and excess profits taxes) , or of its
Territories, or possessions, or any foreign country, or by the authority
of any State, county, school district, or municipality, or other taxing
subdivision of any State, not including those assessed against local
benefits.

(b) In the case of a corporation, joint-stock company or associa-
tion, or insurance company, organized, authorized, or existing luider
the laws of any foreign country, such net income shall be ascertained
by deducting from the gross amount of its income* received within
the year from all sources within the United States —

First. All the ordinary and necessary expenses actually paid within
the year out of earnings in the maintenance and operation of its
business and property within the United States, including rentals
or other payments required to be made as a condition to the continued
use or possession of property to which the corporation has not taken
or is not taking title, or in which it has no equity ;

Second. All losses actually sustained within the year in business or
trade conducted by it within the United States and not compensated
by insurance or otherwise, including a reasonable allowance for the
exhaustion, wear and tear of property arising out of its use or em-
ployment in the business or trade: (a) and in the case (a) of oil and
gas wells a reasonable allowance for actual reduction in flow and
production to be ascertained not by the flush flow, but by the settled
production or regular flow; (b) in the case of mines a reasonable
allowance for depletion thereof not to exceed the market value in
the mine of the product thereof which *has been- mined and sold
during the year for which the return and computation are made, such
reasonable allowance to be made in the case of both (a) and (b}^
under rules and regulations to be prescribed by the Secretary of the
Treasury : Provided, That when the allowance authorized in (a) and
(b) shall equal the capital originally invested, or in case of purchase
made prior to March first, nineteen hundred and thirteen, the fair
iaai<ket value as of that date, no further allowance shall be made,; and

INCOME TAX, 151

(c) in the case of insurance companies, the net addition, if any, re-
quired by law to be made within the year to reserve funds and the
sums other than dividends paid within the year on policyand annuity
contracts: Provided, That no deduction shall be allowed for any
amount paid out for new buildings, permanent improvements, or bet-
terments, made to increase the value of any property or estate, and
no deduction shall be made for any amount of expense of restoring
property or making good the exhaustion thereof for which an allow-
ance is or has been made: Pfovided further, That mutual fire and
mutual employers' liability and mutual workmen's compensation and
mutual casualty insurance companies requiring their members to
make premium deposits to provide for losses and expenses shall not
return as income any portion of the premium deposits returned to
their policyholders, but shall return as taxable income all income re-
ceived by. them from all other sources plus such portions of the
premium deposits as are retained by the companies for purposes other
than the payment of losses and expenses and reinsurance reserves:
Provided further. That mutual marine insurance companies shall in-
clude in their return of gross income gross premiums collected and
received by them less amounts paid for reinsurance, but shall be en-
titled to include in deductions from gross income amounts repaid to
policyholders on account of premiums previously paid by them, and
interest paid upon such amounts between the ascertainment thereof
^and the payment thereof, and life insurance companies shall not in-
clude as income in any year such portion of any actual premium re-
ceived from any individual policyholder' as shall have been paid back
or credited to such individualpolicyholder, or treated as an abatement
of premium of such individual policyholder, witliin such year ;

Third. The amount of interest paid within the year on its indebt-
edness (except on indebtedness incurred for the purchase of obliga-
tions or securities the interest upon which is exempt from taxation
as income under this title) to an amount of such indebtedness not in
excess of the proportion of the sum of (a) the entire amount of the
paid-up capital stock outstanding at the close of the year, or, if no
capital stock, the entire amount of the capital employed in the busi-
ness at the close of the year, and (b) one-half of its interest-bearing
indebtedness then outstanding, which the gross amount of its income
for the year from business transacted and capital invested within the
United States bears to the gross amount of its income derived from all
sources within and without the United States : Provided, That in the
case of bonds or other indebtedness which have been issued with a
guaranty that the interest payable thereon shall be free from taxa-
tion, no deduction for the payment of the tax herein imposed or any
other tax paid pursuant to such guaranty shall be allowed; and in
case of a bank, banking association, loan or trust company, or branch

152 INCOME TAX.

tbereof , interest paid within the year on deposits by or on moneys
yeceived for investment from either citizens or residents of the United
States and secured by interest-bearing certificates of indebtedness
isfiued by such bank, banking association, loan or trust company, or
branch thereof;

Fourth. Taxes paid within the year imposed by the authority of
the United States (except income and excess profits taxes) , or of its
Territories, or possessions, or by the authority of any State, county,
school district, or municipality, or other taxing subdivision of any
State, paid within the United States, not including those assessed
against local benefits.

(c) In the case of assessment insurance companies, whether domes-
tic or foreign, the actual deposit of sums with State or Territorial
officers, pursuant to law, as additions to guarantee or reserve funds
shall be treated as being payments required by law to reserve funds.

KETUBKS.

Sec. 13. (a) The tax shall be computed upon the net income, as
thus ascertained, received within each preceding calendar year end-
ing December thirty-first: Provided, That any corporation, joint-
stock company or association, or insurance company, subject to this
tax, may designate the last day of any month in the year as the day
of the closing of its fiscal year and shall be entitled to have the tax
payable by it computed upon the basis of the net income ascertained
as herein provided for the year ending on the day so designated in
the year preceding the date of assessment instead of upon the basis
of the net income for the calendar year preceding the date of assess-
ment; and it shall give notice of the day it has thus designated as the
closing of its fiscal year to the collector of the district in which its
principal businesa office is located at any time not less than thirty
days prior to the first day of March of the year in which its return
would be filed if made upon the basis of the calendar year ;

(b) Every corporation, joint-stock company or association, or in-
Eurance company, subject to the tax herein imposed, shall, on or
before the first day of March, nineteen hundred and seventeen, and
the first day of March in each year thereafter, or, if it has designated
a fiscal year for the computation of its tax, then within sixty days
after the close of such fiscal year ending prior to December thirty-
first, nineteen hundred and sixteen, and the close of each such -fiscal
year thereafter, render a true and accurate return of its annual net
income in the manner and form to be prescribed by the Commissioner
of Internal Be venue, with the approval of the Secretary of the
Treasury, and containing such facts, data, and information as are
appropriate and in the opinion of the commissioner necessary to. de-

IKOOME TAX. 153

the provisions of this title. The return shall be sworn to by the
president, vice president, or other principal officer, and by the
treasurer or assistant treasurer. The return shall be made to the
collector of th^ district in which is located the principal office of the
corporation, company, or association, where are kept its books of
account and other data from which the return is prepared, or in the
case of a foreign corporation, company, or association, to the collec-
tor of the district in which is located its principal place of business in
the United States, or if it have no principal place of business, office,
or agency in the United States, then to the collector of internal
revenue at Baltimore, Maryland. All such returns shall as received
be transmitted forthwith by the collector to the Commissioner of
[nternal Revenue;

(c) In cases wherein receivers, trustees in bankruptcy, or assignees
jre operating the property or business of corporations, joint-stock
:ompanies or associations, or insurance companies, subject to tax
imposed by this title, such receivers, trustees, or assignees shall make
returns of net income as and for such corporations, joint-stock com-
panies or associations, and insurance companies, in the same manner
ind form as such organizations are hereinbefore required to make
returns, and any income tax due on the basis of such returns made
jj receivers, trustees, or assignees shall be assessed and collected in
,he same manner as if assessed directly against the organizations of
(Those businesses or properties they have custody and control ;

(d) A corporation, joint-stock company or association, or insur-
mce company, keeping accounts upon any basis other than that of
ictual receipts and disbursements, unless such other basis does not
ilearly reflect its income, may, subject to regulations made by the
Commissioner of Internal Revenue, with the approval of the Secre-
ary of the Treasury, make its return upon the basis upon which itg
iccounts are kept, in which case the tax shall be computed upon ita
iicome as so returned ;

(e) All the provisions of this title relating to the tax authorized
,nd required to be deducted and withheld and paid to the officer of
he United States Government authorized to receive the same from
he income -of nonresident alien individuals from sources within the
Jnited States shall be made applicable to the tax imposed by sub-
ivision (a) of section ten upon incomes derived from interest upon
onds and mortgages or deeds of trust or similar obligations of do-
lestic or other resident corporations, joint-stock companies or asso-
iations, and insurance companies by nonresident alien firms, copart-
ierships, companies, corporations, joint-stock companies or associa-
ions, and insurance companies, not engaged in business or trade
dthin the United States s-nd not having any office or place of bud-
ess therein.

3.54 INCOME TAX.

(f) Likewise, all the provisions of this title relating to the tax
authorized and required to be deducted and withheld and paid to the
officer of the United States Government authorized to receive the
same from the income of nonresident alien individuals from sources
within the United States shall be made applicable to income derived
from dividends upon the capital stock or from the net earnings of
domestic or other resident corporations, joint-stock companies or
associations, and insurance companies by nonresident alien com-
panies, corporations, joint-stock companies or associations, and insur-
ance companies not engaged in business or trade within the United
States and not having any office or place of business therein.

ASSESSMENT AND ADMINISIHATION.

Sec. 14. (a) All assessments shall be made and the several cor-
porations, joint-stock companies or associations, and insurance com-
panies shall be notified of the amount for which they are respectively
liable on or before the first day of June of each successive year, and
said assessment shall be paid on or before the fifteenth day of June":
Provided, That every corporation, joint-stock company or associa-
tion, and insurance company, computing taxes upon the income of the
fiscal year which it may designate in the manner hereinbefore pro-
vided, shall pay the taxes due under its assessment within one hun-
dred and five days after the date upon which it is required to file its
list or return of income for assessment ; except in cases of refusal or
neglect to make such return, and in cases of erroneous, false, or
fraudulent returns, in which cases the Commissioner of Internal Eev-
enue shall, upon the discovery thereof, at any time within three
years after said return is due, make a return upon information ob-
tained as provided for in this title or by existing law ; and the assess-
ment made by the Commissioner of Internal Eevenue thereon shall
be paid by such corporation, joint-stock company or association, or
insurance company immediately upon notification of the amount of
such assessment ; and to any sum or sums due and unpaid after the
fifteenth day of June in any year, or after one hundred and five
days from the date on which the return of income is required to be
made by the taxpayer, and after ten days' notice and demand thereof
by the collector, there shall be added the sum of five per centum on
the amount of tax unpaid and interest at the rate of one per centum
per month upon said tax from the time the same becomes due : Pro-
vided, That upon the examination of any return of income made
pursuant to this title, the Act of August fifth, nineteen hundred and
nine, entitled, "An Act to provide revenue, equalize duties and en-
courage the industries of the United States, and for other purposes,"

INCOME TAX. 155

ad the Act of October third, nineteen hundred and thirteen, en-
tled, "An Act to reduce tariff duties and to provide revenue for the
rovernment, and for other purposes," if it shall appear that amounts
f tax have been paid in excess of those properly due, the taxpayer
lall be permitted to present a claim for refund thereof notwithstand-
ig the provisions of section thirty-two hundred and tv^enty-eight of
le Revised Statutes ;

, (b) When the assessment shall be made, as provided in this title,
ie returns together with any corrections thereof which may have
een made by the commissioner, shall be filed in the office of the
)ommissioner of Internal Revenue and shall constitute public rec-
rds and be open to inspection as such: Provided, That any and all
ach returns shall be open to inspection only upon the order of the
'resident, under rules and regulations to be prescribed by the Sec-
iry of the Treasury and approved by the President : Provided fur-
her, That the proper officers of any State imposing a general income
IX may, upon the request of the governor thereof, have access to
lid returns or to an abstract thereof, showing the name and income
f each such corporation, joint-stock company or association, or in-
urance company, at such times and in such manner as the Secretary
f the Treasury may prescribe ;

(c) If any of the corporations, joint-stock companies or associa-
ions, or insixrance companies aforesaid shall ref use^or neglect to make

return at the time or times hereinbefore specified in each year, or
ball render a false or fraudulent return, such corporation, joint-
tock company or association, or insurance' company shall be liable to

penalty of not exceeding $10,000 : Provided, That the Commissioner
f Internal Revenue shall have authority, in the case of either cor-
orations or individuals, to grant a reasonable extension of time in
leritorious cases, as he may deem proper.

(d) That section thirty-two hundred and twenty-five of the Re-
ised Statutes of the United States be, and the same is hereby,
mended so as to read as follows :

" Sec. 3225. When a second assessment is made in case of any list,
tatement, or return, which in the opinion of the collector or deputy
ollector was false or fraudulent, or contained any understatement
r undervaluation, no tax collected under such assessment shall be
Scovered by any suit unless it is proved that the said list, statement,
r return was not false nor fraudulent and did not contain any under-
;atement or undervaluation, but this section shall not apply to state-
lents or returns made or to be made in good faith under the laws
f the United States regarding annual depreciation of oil or gas wells
nd mines."

156 INCOME TAX.

Part III. — Geneeal Administrative Provisions.

Sec. 15. That the word " State " or " United States " when used in
this title shall be construed to include any Territory, the District of
Columbia, Porto Eico, and the Philippine Islands, when such con-
struction is necessary to carry out its provisions.

Sec. 16. That sections thirty-one hundred and sixty-seven, thirty;
one hundred and seventy-two, thirty-one hundred and seventy-three
and thirty-one hundred and seventji'-six of the Revised Statutes of
the United States as amended are herebj^ amended so as to read as
follows :

" Sec. 3167. It shall be unlawful for any collector, deputy collector,
agent, clerk, or other officer or employee of the United States to di-
vulge or to make known in any manner whatever not provided by
law to any person the operations, style of work, or apparatus of any
manufacturer or producer visited by him in the discharge of his
official duties, or the amount or source of income, profits, losses, ex;
penditures, or any particular thereof, set forth or disclosed in any
income return, or to permit any income return or copy thereof or any
book containing any abstract or particulars thereof to be seen or ex-
amined by any person except as provided by law ; and it shall be un-
lawful for any person to print or publish in any manner whatever
not provided by law any income return or any part thereof or source
of income, profits, losses, or expenditures appearing in any income
return; and any offense against the foregoing provision shall be a
misdemeanor and be punished by a fine not exceeding $1,000 or by
imprisonment not exceeding one year, or both, at the discretion of the
court; and if the offender be an officer or employee of the United
States he shall be dismissed from office or discharged from employ-
ment.

" Sec. 3172. Every collector shall, from time to time, cause his
deputies to proceed through every part of his district and inquire
after and concerning all persons therein who are liable to pay any
internal-revenue tax, and all persons owning or having the care and
management of any objects liable to pay any tax, and to make a list
of such persons and enumerate said objects.

" Sec. 3173. It shall be the duty of any person, partnership, firm,
association, or corporation, made liable to any duty, special tax, or
other tax imposed by law, when not otherwise provided' for, (1) in
case of a special tax, on or before the thirty-first day of July in each
year, (2) in case of income tax on or before the first day of March in
each year, or on or before the last day of the sixty-day period next
following the closing date of the fiscal year for which it makes a
return of its income, and (3) in other cases before the day on which
the taxes accrue, to make a list or return, verified by oath, to the col' J

INCOME TAX. 157

lector or a deputy collector of the district where located, of the arti-
cles or objects, including the amount of annual income charged wjth
a duty or tax, the quantity of goods, wares, and merchandise, made
or sold and charged with a tax, the several rates and aggregate
amount,, according to the forms and regulations to be prescribed by
the Commissioner of Internal Revenue, with the approval of the
Secretary of the Treasury, for which such person, partnership, firpi,
association, or corporation is liable: Provided, That if any person
liable to pay any duty or tax, or owning, possessing, or having the
care or management of property, goods, wares, and merchandise,
article or objects liable to pay any duty, tax, or license, shall fail
to make and exhibit a list or return required by law, but shall consent
to disclose the particulars of any and all the property, goods, wares,
and merchandise, articles, and objects liable to pay any duty or tax,
or any business or occupation liable to pay any tax as aforesaid,
then, and in that case, it shall be the duty of the collector or deputy
collector to make such list or return, which, being distinctly read,
consented to, and signed and verified by oath by the person so own-
ing, possessing, or having the care and management as aforesaid, may
be received as the list of such persons: Provided further, That in
case no annual list or return has been rendered by such person to the
collector or deputy collector as required by law, and the person shall
be absent from his or her residence or place of business at the time
the collector or a deputy collector shall call for the annual list or re-
turn, it shall be the duty of such collector or deputy collector
to leave at- such place of residence or business, with some one of
suitable age and discretion, if such be present, otherwise to deposit
in the nearest post ofGce, a note or memorandum addressed to
Buch person, requiring him or her to render to such collector or
deputy collector the list or return required by law within ten days
from the date of such note or memorandum, verified by oath. And
if any person, on being notified or required as aforesaid, shall refuse
or neglect to render .such list or return within the time required as
aforesaid, or whenever any person who is required to deliver a
monthly or other return of objects subject to tax fails to do so at the
time required, or delivers any retiirn which, in the opinion of the
collector, is erroneoiis, false, or fraudulent, or contains any under-
•sValuation or understatement, or refuses to allow any regularly au-
thorized Government officer to examine the books of such person,
firm, or corporation, it shall be lawful for the collector to summon
such iperson, or any other person having possession, custody, or care
of books of account containing entries relating to the business of such
iPerson or any other person he may deem proper, to appear before
Mm and produce such books at a time and place named in the suna-
mons, and to give testimony or answer interrogatories, under oath.

158 INCOME TAX.

respecting any objects or income liable to tax or the returns thereof.
The collector may summon any person residing or found withiii the
State or Territory in which his district lies; and ■when the person
intended to be summoned does not reside and can not be found
within such State or Territory, he may enter any collection district
where such person may be found and there make the examination
herein authorized. And to this end he may there exercise all the
authority which he might lawfully exercise in the district for which
he was coinmissioned : Provided^ That ' person,' as used in this sec-
tion, shall be construed to include any corporation, joint-stock com-
pany or association, or insurance company when such construction is
necessary to carry out its provisions.

" Sec. 3176. If any person, corporation, company, or association
fails to make and file a return or list at the time prescribed by law,
or makes, willfully or otherwise, a false or fraudulent return or list,
the collector or deputy collector shall make the return or list froin
his own knowledge and from such information as he can obtain
through testimony or otherwise. Any return or list so made and sub-
scribed by a collector or deputy collector shall be prima facie good
and sufficient for all legal purposes.

" If the failure to file a return or list is due to siclmess or absence
the collector may allow such further time, not exceeding thirty days,
for making and filing the return or list as he deems proper.

" The Commissioner of Internal Kevenue shall assess all taxes,
other than stamp taxes, as to which returns or lists are so madfe
by a collector or deputy coUectoi-. In case of any failure to make
and file a return or list within the time prescribed by law or by the
collector, the Commissioner of Internal Kevemie shall add to the
tax fifty per centum of its amount except that, when a return is
voluntarily and without notice from the collector filed after such
time and it is shown that the failure to file it was due to a reasonable
cause and not to willful neglect, no such addition shall be made to
the tax. In case a false or fraudulent return or list is willfully made,
the Commissioner of Internal Revenue shall add to the tax one hun-
dred per centum of its amount.

" The amount so added to any tax shall be collected at the same
time and in the same manner and as part of the tax unless the
tax has been paid before the discovery of the neglect, falsity, or
fraud, in which case the amount so added shall be collected in the
same manner as the tax."

Sec. 17. That it shall be the duty of every collector of internal
revenue, to whom any payment of any taxes is made under the pro-
Tisions of this title, to give to the person making such payment a full
written or printed receipt, expressing the amount paid and the pa^
ticular account for which such payment was made; and whenever

INCOME TAX. 159

such payment is made such collector shall, if required, give a separate
receipt for each tax paid by any debtor, on account of payments made
to or to be made by him to separate creditors in such form that such
debtor can conveniently produce the same separately to his several
creditors in satisfaction of their respective demands to the amounts
specified in such receipts; and such receipts shall be sufficient evi-
dence in favor of such debtor to justify him in withholding the
amount therein expressed from his next payment to his creditor;
but such creditor may, upon giving to his debtor a full written re-
ceipt, acknowledging the payment to him of whatever sum may be
actually paid, and accepting the amount of tax paid as aforesaid
(specifying the same) as a further satisfaction of the debt to that
amount, require the surrender to him of such collector's receipt.

Sec. 18. That any person, corporation, partnership, association, or
insurance company, liable to pay the tax, to make a return or to sup-
ply information required under this title, who refuses or neglects to
pay such tax, to make such return or to supply such information
at the time or times herein specified in each year, shall be liable,
except as otherwise specially provided in this title, to a penalty of
not less than $20 nor more than $1,000., Any individual or any officer
of. any corporation, partnership, association, or insurance company,
required by law to make, render, sign, or verify any return or to
supply any information, who makes any false or fraudulent return
or, statement with intent to defeat or evade the assessment required
by this title to be made, shall be guilty of a inisdemeanor, and shall
be fined not exceeding $2,000 or be imprisoned not exceeding one
year, or both, in the discretion of the court, with the costs of prosecu-
tion : Provided, That where any tax heretofore due and payable has
been duly paid by the taxpayer, it shall not be re-collected from any
withholding agent required to retain it at its source, nor shall any
penalty be imposed or coUfected in such cases from the taxpayer,
or such withholding agent whose duty it was to retain it, for failure
to return or pay the same, unless such failure was fraudulent and for
the purpose of evading payment.

Sec. 19. That the collector or deputy collector shall require every
return to be verified by the oath of the party rendering it. If the
collector or deputy collector have re&son to believe that the amount
of any income returned is understated, he shall give due notice to
the person making the return to show cause why the amount of the
return should not be increased, and upon proof of the amount un-
derstated may increase the same accordingly. Such person may fur-
nish sworn testimony to prove any relevant facts, and, if dissatisfied
I yith the decision of the collector, may appeal to the Commissioner
; of Internal Eevenue for his decision under such rules of procedure as
may be prescribed by regulation.

16(? INCOME TAX.

Sec. 20. That jurisdiction is hereby conferred upon the district
courts of the United States for the district within which any person
sunmiened under this title to appear to testify or to produce books
shall reside, to compel such attendance, production of books, and
testimony by appropriate process.

Sec. 21. That the preparation and publication of statistics reason-
ably available with respect to the operation of the income tax law
and containing classifications of taxpayers and of income, the amounts
allowed as deductions and exemptions, and any other facts deemed
pertinent and valuable, shall be made annually by the Commissioner
of Internal Revenue with the approval of the Secretary of the
Treasury.

Sec. 22. That all administrative, special, and general provisions
of law, including the laws in relation to the assessment, remission,
collection, and refund of internal-revenue taxes not heretofore spe-
cifically repealed and not inconsistent with the provisions of this
title, are hereby extended and made applicable to all the provisions
of this title and to the tax herein imposed.

Seo. 23. That the provisions of this title shall extend to Porto Eico
and the Philippine Islands : Provided, That the administration of the
law and the collection of the taxes imposed in Porto Rico and the
Philippine Islands shall be by the appropriate internal-revenue offi-
cers of those governments, and all revenues collected in Porto Eico
and the Philippine Islands thereunder shall accrue intact to the
general governments thereof, respectively: Provided further, That
the jurisdiction in this title conferred upon the district courts of the
United States shall, so far as the Philippine Islands are concerned,
be vested in the courts of the first instance of said islands: And
provided further. That nothing in this title shall be held to exclude
from the computation of the net income the compensation paid any
official by the governments of the District of Columbia, Porto Eico,
and the Philippine Islands, or the political subdivisions thereof.

Sec. 24. That section II of the Act approved October third, nine-
teen hundred and thirteen, entitled "An Act to reduce tariff duties
and to provide revenue for the Government, and for other pur-
poses," is hereby repealed, except aS herein otherwise provided, and
except that it shall remain in force for the assessment and collection
of all taxes which have accrued thereunder, and for the imposition
and collection of all penalties or forfeitures which have accrued or
may accrue in relation to any of such taxes, and except that the un-
expended balance of any appropriation heretofore made and now
available for the administration of such section or any provision
thereof shall be available for the administration of this title or the
corresponding provision thereof.

INCOME TAX. ' 161

Sec. 25. That income on which has been assessed the tax imposed
by section II of the Act entitled "An Act to reduce tariff duties and
to provide revenue for the Government, and for other purposes,"
approved October third, nineteen hundred and thirteen, shall not be
considered as income within the meaning of this title: Provided,
That this section shall not conflict with that portion of section ten, of
this title, under which a taxpayer has fixed its own fiscal year.

Sec. 26. Every corporation, joint-stock company or association,
or insurance company subject to the tax herein imposed, when re-
quired by the Commissioner of Internal Eevenue, shall render a cor-
rect return, duly verified under oath, of its payments of dividends,
whether made in cash or its equivalent or in stock, including the
names and addresses of stockholders and the number of shares owned
by each, and the tax years and the applicable amounts in which such
dividends were earned, in such form and manner as may be pre-
scribed by the Commissioner of Internal Eevenue, with the approval
of the Secretary of the Treasury.

Sec. 27. That every person, corporation, partnership, or associa-
tion, doing business as a broker on any exchange or board of trade
or other similar place of business shall, when required by the Com-
missioner of Internal Eevenue, render a correct return duly verified
under oath, under such rules and regulations as the Commissioner
of Internal Eevenue, with the approval of the Secretary of the
Treasury, may prescribe, showing the name of customers for whom
such person, corporation, partnership, or association has transacted
any business, with such details as to the profits, losses, or other in-
formation which the commissioner may require, as to each of such
customers, as will enable the Commissioner of Internal Eevenue to
determine whether all income tax due on profits or gains of such cus-
tomers has been paid.

Sec. 28. That all persons, corporations, partnerships, associations,
and insurance companies, in whatever capacity acting, including
lessees or mortgagors of real or personal property, trustees acting
in any trust capacity, executors, administrators, receivers, conserva-
tors, and employers, making payment to another person, corporation,
partnership, association, or insurance company, of interest, rent,
salaries, wages, premiums, annuities, compensation, remuneration,
emoluments, or other fixed or determinable gains, profits, and income
(other than payments described in sections twenty-six and twenty-
seven) , of $800 or more in any taxable year, or, in the case of such
payments made by the United States, the officers or employees of the
United States having information as to such payments and required
to make returns in regard thereto by the regulations hereinafter pro-
vided for, are hereby authorized and required to render a true and
33272°— 18 11

162 INCOME TAX.

accurate return to the Commissioner of Internal Revenue, tmder
such rules and regulations and in such form and manner as may be
prescribed by him, with the approval of the Secretary of the Trea9«
nry, setting forth the amount of such gains, profits, and income, and
the name and address of the recipient of such payment: Provided,
That such returns shall be required, regardless of amounts, .in the
case of payments of interest upon bonds and mortgages or deeds of
trust or other similar obligations of corporations, joint-stock com-
panies, associations, and insurance companies, and in the case of col-
lections of items (not payable in the United States) of interest upon
the bonds of foreign countries and interest from the bonds and divi-
dends from the stock of foreign corporations by persons, corpora-
tions, partnerships, or associations, undertaking as a matter of busi-
ness or for profit the collection of foreign payments of such interest
or dividends by means of coupons, checks, or bills of exchange.

When necessary to make eflfective the provisions of this section the
name and address of the recipient of income shall be furnished upon
demand of the person, corporation, partnership, association, or in-
surance company paying the income.

The provisions of this section shall apply to the calendar year nine-
teen hundred and seventeen and each calendar year thereafter, but
shall not apply to the payment of interest on obligations of the
United States.

Sec. 29. That in assessing income tax the net income embraced in
the return shall also be credited with the amount of any excess profits
tax imposed by Act of Congress and assessed for the same calendar
or fiscal year upon the taxpayer, and, in the case of a member of a
partnership, with his proportionate share of such excess profits tax
imposed upon the partnership.

Sec. 30. That nothing in section II of the Act approved October
third, nineteen hundred and thirteen, entitled "An Act to reduce
tariff duties and to provide revenue for the Government, and for
other purposes," or in this title, shall be construed as taxing the
income of foreign governments received from investments in the
United States in stocks, bonds, or other domestic securities, owned
by such foreign governments, or from interest on deposits in banks
in the United States of moneys belonging to foreign governments.

Sec. 31. (a) That the term " dividends" as used in this title shall
be held to mean any distribution made or ordered to be made by a
corporation, joint-stock company, association, or insurance company,
out of its earnings or profits accrued since March first, nineteen hun-
dred and thirteen, and payable to its shareholders, whether in cas&
or in stock of the corporation, joint-stock company, association, or
insurance company, which stock dividend shall be considered income,
to the amount of the earnings or profits so distributed.

INCOME TAX. 163

(b) Any distribution made to the shareholders or members of a
corporation, joint-stock company, or association, or insurance com-
pany, in the year nineteen hundred and seventeen, or subsequent tax
years, shall be deemed to have^been made from the most recently
accumulated undivided profits or surplus, and shall constitute a part
of the annual income of the distributee for the year in which received,
and shall be taxed to the distributee at the rates prescribed by law
for the years in which such profits or surplus were accumulated by
the corporation, joint-stock company, association, or insurance com-
•pany, but nothing herein shall be construed as taxing any earnings
or profits accrued prior to March first, nineteen hundred and thirteen,
but such earnings or profits may be distributed in stock dividends or
otherwise, exempt from the tax, after the distribution of earnings
and profits accrued since March first, nineteen hundred and thirteen,
has been made. This subdivision shall not apply to any distribiition
iriade prior to August sixth, nineteen hundred and seventeen, out of
.earnings or profits accrued prior to March first, nineteen hundred
and thirteen.

Sec. 32. That premiums paid on life insurance policies covering
the lives of officers, employees, or those financially interested in any
trade or business conducted by an individual, partnership, corpora-
tion, joint-stock company or association, or insurance company, shall
not be deducted in computing the net income of such individual, cor-
poration, joint-stock company or .association, or insurance company,
or in computing the profits of such partnership for the purposes of
subdivision (e) of section nine.

Title IX. — Act September 8, 1916.

Sec. 900. That if any clause, sentence, paragraph, or part of this
Act shall for any reason be adjudged by any court of competent
jurisdiction to be invalid, such judgment shall not affect, impair, or
invalidate the remainder of said Act, but shall be confined in its
operation to the clause, sentence, paragraph, or part thereof directly
■involved in the controversy in which such judgment shall have been
rendered.
' Effective September 9, 1916.

Effective date of Act as amended, October 4, 1917,

Act October 3, 1917 :

Sec. 1302. That unless otherwise herein specially provided, this
Act shall take effect on the day following its passage. '

Approved, October 3, 1917.

164 INCOME TAX.

[Public, No. 50, 65th Coagress— H. R. 4280.]

AN ACT To provide revenue to defray war expenses, and for other purposes.

Title I. — Wae Income Tax.

Section 1. That in addition to the normal tax imposed by sub-
division (a) of section one of the Act entitled "An Act to increase
the revenue, and for other purposes," approved September eighth,
itineteen hundred and sixteen, there shall be levied, assessed, collected,
and paid a like normal tax of two per centum upon the income of
every individual, a citizen or resident of the United States, received
in the calendar year nineteen hundred and seventeen and every cal-
endar year thereafter.

Sec. 2. That in addition to the additional tax imposed by sub-
division (b) of section one of such Act of September eighth, nine-
teen hundred and sixteen, there shall be levied, assessed, collected,
and paid a like additional tax upon the income of every individual
received in the calendar year nineteen hundred and seventeen and
every calendar year thereafter, as follows :

One per centum per annum upon the amount by which the total
net income exceeds $5,000 and does not exceed $7,500 ;

Two per centum per annum upon the amount by which the total
net income exceeds $7,500 and does not exceed $10,000 ;

Three per centum per annum upon the amount by which the total
net income exceeds $10,000 and does not exceed $12,500 ;

Four per centum per annum upon the amount by which the total
net income exceeds $12,500 and does not exceed $15,000 ;

Five per centum per annum upon the amount by which the total
net income exceeds $15,000 and does not exceed $20,000;

Seven per centum per annum upon the amount by which the total
net income exceeds $20,000 and does not exceed $40,000;

Ten per centum per annum upon the amount by which the total
net income exceeds $40,000 and does not exceed $60,000 ;

Fourteen per centum per annum upon the amount by which the
total net income exceeds $60,000 and does not exceed $80,000 ;

Eighteen per centum per annum upon the amount by Avhich the
total net income exceeds $80,000 and does not exceed $100,000 ;

Twenty -two per centum per annum upon the amount by which the
total net income exceeds $100,000 and does not exceed $150,000 ;

Twenty-five per centum per annum upon the amount by which the
total net income exceeds $150,000 and does not exceed $200.000 :

Thirty per centum per annum upon the amount by which the total
net income e.xceeds $200,000 and does not exceed $250,000 ;

Thirty- four per centum per annum upon the amount by which the
total net income exceeds $250,000 and does not exceed $300,000;

INCOME TAX. 165

Thirty-seven per centum per annum upon the amount by which the
total net income exceeds $300,000 and does not exceed $500,000 ;

Forty per centum per annum upon the amount by which the total
net income exceeds $500,000 and does not exceed $760,000 ;

Forty-five per centum per annum upon the' amount by which the
total net income exceeds $750,000 and does not exceed $1,000,000 ;

Fifty per centum per annum upon the amount by which the total
net income exceeds $1,000,000.

Sec. 3. That the taxes imposed by sections one and two of this Act
shall be computed, levied, assessed, collected, and paid upon the same
basis and in the same manner as the similar taxes imposed by section
one of such Act of September eighth, nineteen hundred and sixteen,
except that in the case of the tax imposed by section one of this Act

(a) the exemptions of $3,000 and $4,000 provided in section seven of
such Act of September eighth, nineteen hundred and sixteen, as
amended by this Act, shall be, respectively, $1,000 and $2,000, and

(b) the returns required under subdivisions (b) and (c) of section
eight of such Act as amended by this Act shall be required in the
case of net mcomes of $1,000 or over, in the case of unmarried per-
sons, and $2,000 or over in the case of married persons, instead of
$3,000 or over, as therein provided, and (c) the provisions of sub-
division (c) of section nine of such Act, as amended by this Act, re-
quiring the normal tax of individuals on income derived from inter-
est to be deducted and withheld at the source of the income shall not
apply to the new. two per centum normal tax prescribed in section
one of this Act until on and after January first, nineteen hundred
and eighteen, and thereafter only one two per centum normal tax
shall be deducted and . withheld- at the source under the provisions
of such subdivision (c), and any further normal tax for which the
recipient of such income is liable under this Act or such Act of
September eighth, nineteen hundred and sixteen, as amended by this
Act, shall be paid by such recipient.

Sec. 4. That in addition to the tax imposed by subdivision (a) of
section ten of such Act. of September eighth, nineteen hundred and
sixteen, as amended by this Act, there shall be levied, assessed, col-
lected, and paid a like tax of four per centum upon the income re-
ceived in the calendar year nineteen hundred and seventeen and
every calendar year thereafter, by every corporation, joint-stock com-
pany or association, or insurance company, subject to the tax imposed
by that subdivision of that section, except that if it has fixed its own
fiscal year,- the tax imposed-by this section for the fiscal year ending
during the calendar year nineteen hundred and seventeetn shall be
levied, assessed, collected, and paid only on that proportion of its in-
come for such fiscal year which the period between January first,

16S INCOME TAX.

nineteen hundred and seventeen, and the end of stich fiscal year bears
to the whole of such fiscal year.

The tax imposed by this section shall be computed, levied, assessed,
collected, and paid upon the same incomes and in the same manner as
the tax imposed by subdivision (a) of section ten of such Act of
September eighth, nineteen hundred and sixteen, as amended by this
Act, except that for the purpose of the tax imposed by this section
the income embraced in a return of a corporation, joint-stock com-
pany or association, or insurance company, shall be credited with the
amount received as dividends upon the stock or from the net earnings
of any other corporation, joint-stock company or association, or 'in-
surance company, which is taxable upon its net income as provided
in this title.

Sec. 5. That the provisions of this title shall not extend to Porto
Eico or the Philippine Island, and the Porto Rican or Philippine
Legislature shall have power by due enactment to amend, alter,
modify, or repeal the income tax laws in force in Porto Rico or the
Philippine Islands, respectively.

Title X. — Administeative Provisions.

*,* * * * Hi «

Sec. 1001. That all administrative, special, or stamp provisions of
law, including the law relating to the assessment of taxes, so far as
applicable, are hereby extended to and made a part of this Act, and
every person, corporation, partnership, or association liable to any
tax imposed by this Act, or for the collection thereof, shall keep such
records and render, under oath, such statements and returns, and shall
comply with such regulations as the Commissioner of Internal ReV"
enue, with the approval of the Secretary of the Treasury, may from
time to time prescribe.

*******

Sec. 1003. That in all cases where the method of collecting the tax
imposed by this Act is not specifically provided, the tax shall be col-
lected in such mann'er as the Commissioner of Internal Revenue with
the approval of the Secretary of the Treasury may prescribe. All
administrative and penalty provisions of Title VIII of this Act, in so
far as applicable, shall apply to the collection of any tax which the
Commissioner of Internal Revenue determines or prescribes shall be
paid by stamp.

Sec. 1O04. That whoever fails to make any return required by this
Act or the regulations made under authority thereof within the time
prescribed or who makes any false or fraudulent return, and whoev«l?
evades or attempts to evade any tax imposed by this Act or fails to
collect or truly to account for and pay over any such tax, shall be sub-
ject to a penalty of not more than $1,000. or to imnrisonmen^-, for not

INCOME TAX. 167

more than one year, or both, at the discretion of the court, and in
addition thereto a penalty of double the tax evaded, or not collected,
or accounted for and paid over, to be assessed and collected in the
■same manner as taxes are assessed and collected, in any case in which
the punishment is not otherwise specifically provided.

Seo. 1005. That the Commissioner of Internal Revenue, with the
approval of the Secretary of the Treasury, is hereby authorized to
make all needful rules and regulations for the enforcement of the
provisions of this Act.

*******

Sec. 1008: That in the payment of any tax under this Act hot pay-
able by stamp a fractional part of a cent shall be disregarded unless it
amounts to one-half cent or more, in which case it shall be increased
to one cent.

Sec. 1009. That the Secretary of the Treasury, under rules and
regulations pirescribed by him, shall permit taxpayers liable to in-
come and excess profits taxes to make payments in advance in install-
ments or in whole of an amount not in excess of the estimated taxes
which will be due from them, and upon determination of the taxes
actually due any amount paid in excess shall be refunded as taxes
erroneously collected : Provided^ That when payment is made in in-
stallments at least one-fourth of such estimated tax shall be paid
before the expiration of ihirty days after the close of the taxable
year, at least an additional one-fourth within two months after the
close of the taxable year, at least an additional one-fourth within
four months after the close of the taxable year, and the remainder
of the tax due on or before the time now fixed by law for such pay-
ment: Provided further, That the Secretary of the Treasury, under
rules and regulations prescribed by him, may allow credit against
such taxes so paid in advance of an amount not exceeding three per
centum per annum calculated upon the amount so paid from the date
of such payments to the date now fixed by law for such payment; but
no such credit shall be allowed on payments in excess of taxes de-
termined to be due, nor on payments made after the expiration of
four and one-half months after the close of the taxable year. All
penalties provided by existing law for failure to pay tax when due
are hereby made applicable to any failure to pay the tax at the time
or times required in this section.

Sec. 1010. That under rules and regulations prescribed by the Sec-
retary of the Treasury, collectors of internal revenue may receive, at
par and accrued interest, certificates of indebtedness issued under sec-
tion six of the Act entitled " An Act to authorize an issue of bonds to
■toeet expenditures for the national security and defense, and, for the
purpose of assisting in the prosecution of the war, to extend credit to
fbleign governments, and for other purposes," approved April

168 INCOME TAX.

twenty-fourth, nineteen hundred and seventeen, and any subsequent
Act or Acts, and uncertified checks in payment of income and excess-
profits taxes, during such time and under such regulations as the
Commissioner of Internal Kevenue, with the approval of the Secre-
tary of the Treasury, shall prescribe ; but if a check so received is not
paid by the bank on which it is drawn the person by whom such check
has been tendered shall remain liable for the payment of the tax and
for all legal penalties and additions the same as if such check had
not been tendered.

GENERAL PROVISIONS.

Sec. 1212. That any amount heretofore withheld by any withhold-
ing agent as required by Title I of such Act of September eighth,
nineteen hundred and sixteen, on account of the tax imposed upon the
income of any individual, a citizen or resident of the United States,
for the calendar year nineteen hundred and seventeen, except in the
cases covered by subdivision (c) of section nine of such Act, as
amended by this Act, shall be released and paid over to such indi-
vidual, and the entire tax upon the income of such individual for such
year shall be assessed and collected in the manner prescribed by such
Act as amended by this Act.

* * * * * ^i *

Sec. 1300. That if any clause, sentence, paragraph, or part of thig
Act shall for any reason be, adjudged by any court of competent juris-
diction to be invalid, such judgment shall not affect, impair, or in-
validate the remainder of said Act, but shall be confined in its opera-
tion to the clause, sentence, paragraph, or part thereof directly in-
volved in the controversy in which such judgment shairhave been
rendered.

EFrECTIVE DATE Or ACT.

Sec. 1302. That unless otherwise herein specially provided, this
Act shall take effect on the day following its passage.
Approved, October 3, 1917.
Effective October 4, 1917.

INDEX TO REGULATIONS NO. 33, REVISED.

[The references are to paragraph numbers.]

Par,
Abatement of tax and penalties _ 733

(See also Claims for refund and abatement of tax and penalties.)

Absence of principal officer of corporation 641

Absconding taxpayer ; credit allowed to collector for tax uncollectible 715

Accounts receivable _ __ ~~ 353

Accrual basis, returns made on :

Corporations 418_ 559

Individuals lg7_ y;^

Accrued expenses deductible though not actually paid 167, 171, 418

Interest ___- __ — _ ' '__ ' 559

Actors and actresses; depreciation of costumes 124

Actual owner versus record owner of stock in connection with dividends- 224, 599

Ad valorem penalties attach to income 285

Additional tax:

Liberty Loan 4 per cent bonds ; interest on 69, 344

Nonresident aliens 158, 16O

Rates— I- 5, 6, 158,' 160

Specific exemption does not apply to 154

Tabulation of amounts and rates 162

Undistributed profits of corporation 161

Additions and betterments . 433, 688

Effect on depreciation 433

Administration expenses 102

Administrators. (See Executors.)

Advance payment of tax in whole or in installments ^- <1 249

Affidavit required by insurance companies to show exemption 681

Agency balances : Insurance companies 693

Agent may make claim for refund for claimant 752

Agent versus fiduciary 190

Agents or representatives of nonresident aliens 142, 217, 223

Extent of agency appointment 223

Income accruing to alien from various sources 218

Income in custody or control prior to and subsequent to October 3,

1917 219

Agricultural organizations 313, 322, 325

Aliens, nonresident. (See Nonresident aliens.)

Aliens, resident 4

Alimony 13

Amended returns 344, 661

Readjustments due to modified Tfeasury Department interpretations- 245

Ancillary administrators 180

169

170 INDEX TO REGULATIONS NO. 33, BEVISED.

Army officers: . Par.

Pay and allowances, of : 103

Ileturns, where filed 17*

Assessment Insurance companies; guaranty and reserve funds 695

Assessment of tax:

Additional assessments 655, 661

Corporations . 652

Individuals - 242

Assessments voluntarily paid by stockholders 360

Assignees to make return and pay tax 622

Attorneys' fees 53

Avocation versus occupation 120

Bad debts:

Citizens and residents 14, 82, 93

Bankruptcy in connection with 97

Compromises of indebtedness 93

Corporations 465

Nonresident aliens 135

Recoveries : 380

Bank deposits :

Foreign Governments 348

Interest paid on, is deductible 578

Bank discounts, method of handling 385

Bank stock, taxes paid on, for stockholders 118, 581

Stock transferred between assessment and payment of tax 110

Bankruptcy in connection with bad debts 97

Banks :

Depositors' guaranty fund 455

Gross income of 351

Securities, shrinkage in value of 459

Taxes paid on capital stock for shareholders 118, 581

Bequests 67

Appraised value at time of death 44

Betterments 433, 688

Bills receivable 355

Boards of trade 312

Bonds :

Coupons exchanged for . 17

Discount 'on bonds sold 461

Retirement of; loss due to 467

Shrinkage in value of 459,471

Sinking fund reserve 492

United States bonds. (See Government bonds.)

Bonuses 1 ^ 40, 111, 487, 441

Bookkeeping ; making return on basis of books kept :

Corporations : 418,559

Indivitluals J 167, 171

Books of corporations open to inspection 639

Branches of corporations versus subsidiaries 617

Brokers to supply information at the source 232

Building and loan associations 313,317

Income accruing to shareholders 18

INDEX TO REGULATIONS NO. 33, EEVISED. 171

Buildings : p^^..

Additions aud betterments versus depreciation 433

Depreciation of, in connection witli tlie real estate 488

Erection of new 474

Obsolescei'ico of 485

Repairs versus depreciation 432

Voluntary removal of 473

Business defined, in connection with losses 120

Business leagues 312

Capital assets, depreciation of 487

Capital assets, profit or loss from sale or other disposition of :

Banks 352

Corporations in general 366, 387

Insurance companies 679

Mutual companies 708

Paid for in stock or bonds of purcliasing corporation 367, 393, 411

Capital employed in business in connection with computation of deduc-
tible interest 563

Interest on capital invested 572

Capital investment versus expense 105

Capital stock, original issue of 361

Expense incident to sale of_ 453

Paid up in connection with computation or deductible interest 561

(See aUo Stock.)

Oar-trust certificates , 573

Cemetery companies , 318

Certificates. (See Ownership certificates.)

Certified copies of returns 647

Chambers of commerce 312

Change bf name of corporation 613

Charitable organizations 312

Children ; additional specific exemption on account of 155

Civic leagues — 312

CJlaims by collectors for credit for uncollectible taxes and penalties 715

Preparation of claim 719

Claims for refund or abatement . 733

Abatement on F6rm 47 734

Bearing on 5 per cent penalty and 1 per cent interest 744

Does not* operate as a delay of collection 743

Refund on Form 40 749

Agent may malM claim for claimant 752

Executors or administrators inay make claim 752

Payment of claims allowed 753

Statute of limitations — 756

Exception 757

Claims for sums recovered by suit 772

Clubs 312, 320

Collection of tax :

Corporations 652

Individuals 246

Collectors of internal revenue :

Claims by, for credit for uncollectible taxes and penalties 719

172 INDEX TO REGULATIONS NO. 33, EEVISED.

Collectors of internal revenue — Continued.

Duties in connection with — Pat.

Claims for abatement of taxes and penalties . 734

Claims for refund r 749

Duplicate charges 746

Litigated taxes 726

Suits for taxes 726

Suits, sums recovered from collectors by 772

Commissioner of Internal Revenue:

Abatement and refund of taxes 733

Extension of time for filing returns '— 165, 642

Returns made by, if taxpayer fails to make or makes false return__ 253, 638

The three-year limitation in oonnection with assessment of taxes 243,

253, 638, 658

Commissions paid salesmen 19, 54

In connection with sale and purchase of securities 108

Nonresident aliens 221

Committee for an Incompetent 203

Common law partnership 316

Compensation 21, 51, 441

Army officers 1 103

Based on stock holding 441

Bonuses 111, 437, 441

Deduction of, as an expense, by the payer 101, 441

Fees are Income in year received ; 53

In kind 21

In stock, etc 22, 444

Information in regard to, at the source 233

Judges of United States 72

Living quarters in addition to salary 235

Nonresident aliens [ 221

President of the United States 72

Receipt basis 51

State officers or employees 47,71

Unpaid 96

Compromise, offers in; specific penalties 295

Effect on claim for abatement 739

Compromises of Indebtedness 93

Contract sales .' 390 397

Contracting companies 393

Corporative associations 326

Corporations g^ 297

Accrual basis for making return 418,559

Assignees " 321

Books and bookkeeping 4I8 559

Branches versus subsidiaries 1 -_ 617

Capital assets ; profit and loss from sale of 366, 387

When sold for stock or bonds of purchasing corporationj_ 367, 393, 411

Capital stock, original Issue 361

Change of name gl3

Common-law partnerships 3O6

(Sec also Partnerships.)

INDEX TO EEGULATIONS NO. 33, REVISED. 173

jorporations — Continued.

Credits— j.^,

Amounts witlilield at source (foreign corporations) ^_ 591,002

Dividends for war income tax of 4 per cent 9, 298, 372, 592

Excess-profits tax 2, 594

Tax paid on tax-free covenant bond interest 401, 593

Deductions 418

Defined 299

Depletion —

Mines 52g

Oil and gas wells 598

Patents ' 552

Timber lands , 547

Depreciation 477

Dissolved corporations 608, 612

Dissolved prior to October 4, 1917 304

Dividends distributed 373

Record to be kept by years 376

Returns of ,__ 665

Stockholders to be given notice of year or years in which surplus

distributed was earned '. 376

Dividends received 372

Credited for war income tax , 9, 298, 372, 592

Rate at which taxable 374

Excess-profits tax credited for purpose of assessing income tax 2, 594

Exemption claimed at the source on bond interest 263

Exempt corporations 312

Applies to war Income tax 315

Exempt income 340

<" ' Expenses 428

Farming corporations 404

Fiscal year corporations . 606, 626

Foreign corporations 307, 590

Gross income of 349

Holding companies 386, 394, 417, 616

Incomplete corporations 303

Insurance companies 669

(See also Insurance companies.)

Insurance on lives of officers for benefit of corporation 664

Interest deductible 558

Inventories 353, 354, sbe, 481

Joint-stock companies 300

Lessee and lessor corporations 368, 415, 445

, Limited partnerships 305

Liquidating corporations 304, 608, 612

Losses 457

Profit and loss from sale of capital assets 366, 367, 387, 393, 411

Net income : 589

Newly formed corporations 339, 609, 627

Ownership certificate to be used when presenting coupons, etc, for

collection 203

Receivers '■ 621

174 INDEX TO REGULATIONS NO. 33, KEVISED.

Corporations — Continued. Par.

Retui-ns 606/

Of names and addresses of stockholders and dividend payments. 66D

Stockliolders, return of names and addresses of 665

Subsidiaries 386, 394, 417, 614

Brandies =s 617

Tax on corporations 8, 9, 297, 298, 337

Collection and payment of 652

Prorating for tiscal year 387

Taxes deductible 579

Trustees in bankruptcy 621

TJndistributed profits —

Liability to tax to corporations 667

Liability to tax to stockholders 161

Cost of materials - 430

County fairs 323

Coupons, collection of. (See Ownership certificates.)

Coupons exchanged for bonds ^ 17

Credits to collectors for imcollectible taxes and penalties 715

Preparation of claims 719

Credits to taxpayers:

Amounts on which tax has been withheld at source: 126, 138, 591, 602

Citizens and residents : 2, 116, 126, 143

Corporations 591

Dividends to corporations for war income tax 9, 298, 372, 592

Dividends to individuals for normal tax 126

Excess-profits tax , 2, 116, 128, 140, 594

Exemption, specific, to citizens and residents 143

Interest on account of advance payment of tax 249

Nonresident alien corporations 591,602

Nonresident alien individuals . 138, 141, 216

Partnerships 211

Customs duties 588

Dairies, cooperative 328

Damages paid 476

Damages recovered :

Corporations 357

Individuals 25

Debtors to supply information at the source 233

Debtors to withhold tax at the source. (See Deduction of the tax at
tho'feourcc.)

Debts. (See Bad debts.)

Decedents; Income accruing to time of death 23,152

Delay in payment of tax 246,279

Deduction of the tax at the source (citizens and residents) :

Application; interest on tax-free covenant bonds 256

Equipment trust or car-trust certificates 576

Credit for amounts withheld 126

Exemption claims 257, 263, 271

Exemption not claimed 262

Payment to creditors of amounts withheld in 1917 prior to October 3- 274

Deduction of the tax at the source (exempt organizations) ; required
to withhold on income that is subject to deduction of the tax 336

IKDEX TO EEGULATIONS NO. 33, REVISED. 175

)eduction of the tax' at the soui-ce (foreign nonresident corporations) : par.

Application ; bond interest 272, 603

Ownership certificate to be filed 262,603

Application ; dividends 225, 596

Credit for amounts withheld 591,602

Exemption from withholding to corporations having an office or

place of business in the United States 598, 603

Ownership certificate to be filed in connection with bond interest- 262

Jeduction of the tax at the source (nonresident aliens) 21T, 255

Credits for amounts withheld 138, 141, 216

Ownership certificate in case of bond interest 262

Salaries, wages, commissions, rents for services rendered and prop-
erty located abroad and paid for from income wholly earned abroad. 221

Deductions allowed 74

Citizens and residents 70'

Corporations 418

"Accrued" versus "paid" 418,559

Insurance companies : 685

Konresident aliens i 129, 141, 216

Partnerships :. 211

5eed of trust must be absolute and irrevocable 194

defaults in connection with installment sales: 389

Delinquent returns voluntarily filed after last due date 291, 643

Dependent children; additional exemption on account of 155

(See also Minors.)
Depiction deductible:

Citizens and residents ._ , . 85, 125

Corporations —

Depletion funds used for payment of bonded indebtedness 403

Mines 526

Depreciation in addition : 546

Oil and gas wells ^^ . 497

Depreciation in addition 510

Patents 552

Reserves, dividends from 482

Timber lands 547

Nonresident aliens 137

Depositors guaranty funds 455

Deposits, bank:

Foreign Governments : — 318

Interest on, is deductible by bank 578

Depreciation deductible or not':

Additions and betterments versus depreciation 433

Adjustment of charges to depreciation made in previous years 491

Charged off, depreciation must be 480

Citizens and residents-^^ 83, 124

Corporations ^'^'^

Dividends from depreciation reserves 482

Farms ^09

Good will 49^

Lessees 4^^*

Merchandise ^9*5

w

176 INDEX TO BEGULATTONS NO. 33, REVISED.

Depreciation deductible or not — Continued. Par.

Mines ; physical property other than natural deposits 546

Nonresident aliens 136

Obsolescence in relation to depreciation^ 485

Oil and gas wells ; physical property other than natural deposits 510

Rates 485

Real estate and the buildings thereon 487

Repairs versus depreciation 432

Reserves , 482, 489

Securities, shrinliage in value of 459,487

Sinking-fund reserve for retirement of bonds 492

Trust estates 199

Devises 67

Appraised value at time of death 44

Discounts, method of handling 385

Bonds sold . 401

Dissolved corporations , 608, 612

Dissolved prior to October 4, 1917 304

Dividend checks, foreign, collection of. (See Ownership certificates.)

Dividends '. 373

1917 distributions specifically 375

Corporations receiving dividends 372

Credited for war income tax 9, 298; 372, 592

From subsidiaries 386, 616

Credit to individuals for noraial tax 126

Defined JP , 378

Depreciation reserves --- 26, 482

Federal reserve banks, dividends declared by 345

Fiduciaries, stock dividends in hands of 206

Foreign dividends ; information at the source 236

Insurance companies in receipt of . 097

Foreign nonresident corporations, domestic dividends payable to 225, 596

Record versus actual owner of stock 226,001

Interest on Government bonds 42

Life insurance companies — Cash dividends 702

Dividends provisionally ascertained 703

Life insurance ; paid up policies : 46

Nonresident aliens, dividends payable to 226

Nonresident alien partnerships ; actual but not record owner of stock 226

Partnerships, dividends received by • 211

Profits accrued prior to March 1, 1913 373

Distributions made prior to August 6, 1917 374,377

Profits accrued since March 1, 1913 373

Rate at which taxable 374

Notice by corporation to stockholders 376

Rent, dividends in lieu of 368

Record owner acting for nonresidental alien actual owner 224,601

Return of dividend payments by. corporations 665

Security investments, dividends paid from 27

Stock dividends 373

Representing a capitalization of good will, etc., or of apprecia-
tion in value of assets - 28

Subsidiaries, earnings of, to parent -. ...^. 386,616 !

INDEX TO KEGULATIOITS NO. 33, BEVISE]>. 177

Donations deductible: p^^^

Citizens and residents 87

Corporations 435

Donations received ;.

• Corporation ; its own stock 364

Individuals 41^ q-j

Drawings, models, patterns, etc 553

Due date ; " Isist due date " definded 635

Duplicate charges; collectors' duties 746

Educational organizations 312

Effective date of Treasury Decisions . 245

Eqiuipment trust certificates 573

Estates, tax liability — , '. 7, 24 198

In process of administration 7, 24, 195

Closed administration, return 173, 179

Specific exemption 147

Trust estates^ 7, 192, 206, 210

Depreciation 199

Estates of insane, deceased, or insolvent persons; delay in payment of

tax 246, 279

Excess payment of tax in one year not an offset for another year 247

Excess profits tax. {See War excess profits tax.)

Exchange of property for stocli 381

Executors and administrators '. 7, 23, 192

Ancillary administrators l 180

Claims for refund of taxes may be made by 751

Closed administration, return . 173, 179

Returns by :i 195

Exempt corporations '. 312, 313

Applies to war income tax 815

Deduction at the source requirements apply to 336

■ Doubtful as. to exemption 332

' Exemption once es1;ablislied 334

Insui-ance companies 681

Afiidavit required 688

■ Qualification for exemption 331

Esepipt income : 64, 340

Nonresident aliens 220, 221

Partnerships 211

Exemption against withholding by foreign corporations having an office

or place of business in this country 263, 598, 603

Exemption claims at the source :

. .Citizens and residents 257,263,271

Corporations, domestic ; and foreign having an office or place of busi-
ness in the United States 263

Partnerships, domestic or nonresident alien 263

Exemption, specific 143

Additional tax, relation of specific exemption to 154

Citizens or residents only 143

At the source >- 257, 263, 271

Decedent's income to time of death 152

.. Dependent children ,^ 155

■■ Estates 147

178 INDEX TO EEGULAnONS NO. 33, REVISED.

Exemptions, specific — Continued. Par.

Fiduciaries 147, 151

Head of family 146, 153

Husband or wife 170

One or other dying during year 156

Konresident aliens, none 217, 255

War income tax 148

Expenses deductible:

Citizens and residents 77, 100

Corporations 428

Insurance companies 686

Nonresident aliens 131

Reimbursements 112

Extension of time for filing return 165, 640, 642, 648

Does not correspondingly extend time for payment of tax 654

Failure to file return on time:

Corporations 296, 633, 638, 643, 645

Officer of corporation 657

Individuals 253, 281, 291, 296

Notice of, from collector 293

Offers in compromise 295

Failure to pay tax on time:

Corporations 656

Individuals 246,279

On return made by commissioner 253

False return :

Corporations 296, 638, 656

Officer of corporation 657

Individuals 253, 288, 296

Farmers' mutual hail, cyclone, etc, associations 681

Farms and farmers 29, 404

Depreciation 409

Federal land banks 313

Federal reserve bank dividends 1__ 345

Fees ; income of year of receipt 53

Fidelity Insurance companies -713

Fiduciaries 185

Agents versus fiduciaries 190

Appointment of 194

Decedents' Income to time of death 23,152

Estates during period of settlement 7,24,195

Closed administration 173, 179

Executors and administrators 7, 23, 192

Closed administration 173, 179

Guardians, trustees, etc 151, 185, 192, 201, 204

Indemnifying of 209

Joint fiduciaries 188

Nonresident aliens; fiduciaries for 187

Power of attorney as related to fiduciaries 191

Returns by 185

Specific exemption ^ 147, 151

Trust estates 7, 192, 206, 210

Trustees, guardians, etc 151, 185, 192, 201, 204

IKDEX TO REGULATIONS NO. 33, EEVISED. 179

Par.

Final returns by corporations 608

First bank or collecting agency when no ownerfship certificate accom-
panies item for collection:

Domestic items 262

Foreign items :. 237

Fiscal agents, responsibilities of, in connection witb information at the

source on foreign items . 231

Fiscal year, establishment of:

■ Corporations 626

Change from one fiscal year to another 628

Change from fiscal year to calendar year 684

Returns 606, 626

Partnerships 214

Fiscal year ending during 1916 662

Foreclosure of mortgage 98

Foreign corporations 307, 308

Credit for amounts withheld at source 591, 602

Deduction of tax at the source —

Bond interest 272, 603

Ownership certificate to be filed 262, 603

Credit for amounts withheld 591, 602

Dividends ^_ 225, 596

Exemption ; manner of claiming by foreign corporation having an

office or place of business in the United States 263, 598, 603

Return of amounts withheld 599

Income taxable 1 309, 350, 590

Nonresident foreign corporations having no office or place of business

in the United States--^ ^ 309

Deduction of tax at the source. (See, immediately above, De-
!; , ■ duction of tax at the source.)

' Dividends accruing to, as actual owner though not record owner

of stock 226, 600

Dividends payable to, as record and actual owner of stock 226

Dividends payable to, as record but not actual owner of stock — 226

Returns by or for 226,311,601,604

Foreign dividends received by insurance companies ^ 697

Foreign Governments; income accruing to, from investments in domestic

securities and from interest on bank deposits-- 348

■Foreign insurance companies 711

Income from United States investments 712

.'Foreign items, collection of 236

.■;.- License required 276

'Fractional parts of cents 251

,<Fraternal beneficiary societies 313, 681

Furniture ; cost of repairs ; insurance companies 433, 689

Gas and oil wells, depletion of 86, 497

Depreciation in addition 510

Gifts made, deductibility of:

Citizens and residents 87

!." Corporations '^^^

t-Gifts received by corporation of its own stock 364

Gifts received by individuals 67

-Stock ; profit or loss on subsequent disposition 41

180 INDEX TO REGULATIONS NO. 33, REVISED.

Good will : Par.

Capital izatiou of; stock dividends , 28

Depreciation 'not allowed 494

Losses in connection with 125

Government bonds, interest on:

Dividends including such interest 42

Exempt income generally : 69, 343, 365

Exception 69, 344

Information at the source not required 241

Nonresident aliens 220

Not included on return by individuals 178

Partnerships; interest received by 211

Gross Income:

Banks 351

Contracting companies :_ 398

Corporations generally 349

Farming corporations 404

Individuals 12

Insurance companies 673

Life insurance companies 698

Mutual insurance companies other than mutual life and mutual

marine 706

Manufacturing corporations 353

Mercantile corporations 354

Miscellaneous corporations 356

Guardians. {See Fiduciaries.)

Head of family 146, 153

Returns by 169

Holding companies:

Earnings of subsidiaries 386

Returns by 417, 616

Sale of property by subsidiaries to parent 394

Horticultural organizations 313, 322, 325

Husband and wife:

Alimony ^_ 13

One or the other dying during the j'ear 156

Returns 182,183

Delinquencies of one or the other 182

Separation agreement allowance 13

Specific exemption .: 170

Wife's income 183

Import duties 588

Incidental repairs 688

Income :

Citizens and residents . 12

Corporations 349

Foreign 309,350

Information at the source. (See Information at the source.)

Insurance companies 673

Nonresident aliens . 4, 220, 221 •;

Receipt basis 51

Income tax is a debt due the United States 248

Income tax law, intent and purpose of 277

■INDEX TO REGULATIONS JSO. 33, REVISED, 181

Income taxes are not deductible : j,^^

Citizens and residents 79 ^q

Corporations ~ ' g™

Nonresident aliens II"~ 132

Incomplete corporations 304

Indemnifying of fiduciaries 200

Information at the source of income 232

Actual owner of income being other than payee 240

Brokers; of tranactions for customers 232

Debtors; interest on domestic securities 236

Interest on Government obligations exempt 241

Debtors : miscellaneous income of $800 or more 233

Dividends on foreign stock, collection of 236

License required for foreign items 276

Dividend payments 665

Foreign items, collection of 236

License required for foreign items ^_ 276

Letter of transmittal to accompany return 234

Penalties 240, 281, 293

Eeturns, when filed , : 234

Stockholders; names and addresses of : 665

Insane persons; delay in payment of tax : 246,279

Insolvency ; credit allowed collectors for uncollectible tax 716

Insolvent persons ; delay in payment of tax 246, 279

Inspection of returns 646

Installment sales 389

Defaults 3S9

Merchandise 395

Real estate 390

Insurance companies 669

■ Agency balances 693

" Assessment companies; reserves 695,713

Capital assets, sale of 679

Capital stock; taxes paid for stockholders 696

Deductions 685

Dividends of foreign corporations 697

Kxempt companies 681

Affidavit required 683

Expenses of 6SG

Fidelity insurance companies 713

Foreign insurance companies 7il

Income from United States investments 712

Furniture ; cost of repairs, etc GS9

Income of —

Exempt 675

Gross 673

Life insurance 698

Net 670,684

Interest deductible 687

Life insurance companies 698

Dividends paid 702

Dividends provisionally ascertained 703

Gross income 698

182 INDEX TO KEGULATIONS NO. 33, BEVI&ED.

Insurance companies — Continued.

Life insurance companies — Continued. Par.

Mutual 685

Premium income paid bacli 700

Reserves 695

Surrender values : 698

Losses deductible 691

Mutual insurance companies other than mutual life and mutual

marine 704

Capital assets, sale of 708

Gross income 706

Rent income 707

Return; special form 705

Mutual life insurance companies 685

Mutual marine insurance companies 710

Policy losses- 694

Premium deposits 678, 680

Premium income 695

Premiums paid on policies insuring lives of officers for benefit of

company not deductible 690

' Reinsurance 677, 680

Reserves 678, 680, 695

Returns 671, 676, 714

Mutual insurance companies other than mutual life and mutual

marine 705

Stock casualty insurance companies - 713

Stock flre insurance companies 713

Stock insurance companies (miscellaneous) 713

Surety insurance companies 713

Insurance paid :

Insuring lives of members for benefit of partnership 211, 212 '

Insuring lives of officers for benefit of corporation 664, 690

Personal versus business 109

Insurance received, life :

Beneficiaries, received by 65

Dividends on paid-up policies 46

Estate of decedent 196

Insured, received by the 45, 66

Renewal premiums 56

Interest accrued to time of purchase of bond 15

Interest allowed on advance payment of tax 249

Interest deductible :

Banks ; interest paid on deposits 578

Citizens and residents 78

Corporations in general 558

Equipment-trust or car-trust certificates . 573

Indebtedness not secured by property collateral subject to sale or

hypothecation in business 569

Interest on capital invested in business 572

Interest on. deposits by banks 578

Interest paid on account of rent- 571

Rates 568

Insurance companies 687

Nonresident aliens 131

INDEX TO KEGXJLATIONS NO. 33, KEVISEO. 183

Par.

Interest on capital invested in business 572

Interest paid on account of rent 571

Interest paid on bank deposit; deductible by bank 578

Foreign Govemmeuts not taxed on__- . 348

Inventories 353, 354, 396, 481

Irrigation bonds 471

Joint fiduciaries 188

Joint-stock companies defined 300

Judges, Federal, salaries of 72

Judgments ;

Damages recovered 25, 357

Losses on 476

Labor organizations 313, 322

Last due date 635

Leaseholds, deduction allowed in connection with purchase of I'iS

Lessees and lessors 50, 57, 115

Corporations 368, 415, 445

Depletion of mines; lessees 528,541

■ Depletion of oil and gas wells ; lessees 502

Information at the source 233

Letter of transmittal to accompany returns of information at the source 234

Liberty Loan 4 Per Cent Bonds 69, 344

License for collection of foreign items ^_ ^ ; 276

Life insurance. (See Insurance.)

Life insurance companies 698

Dividends paid 702

Dividends provisionally ascertained 703

Gross income 698

Mutual companies 685

Premium income paid back _ 700

Reserves 695

Surrender values 698

Limited partnership 305

Liquidating corporation 304, 608, 612

Litigated taxes — 726

Live stock 406, 472

Living quarters in addition to salary 235

Lobbying expenses 451

Local benefits; taxes assessed against 586

Citizens and residents 79, 116

Corporations 579

Nonresident aliens '■ 132

Lodge system, societies operating under 313, 330, 681, 682

Losses deductible:

Citizens or residents . '■ 80, 120

Corporations 457

Profit and loss from sale of capital assets 366, 367, 387, 393, 411

Insurance companies 691

Nonresident aliens 133, 134

Not connected with business or trade 81, 120

Partnership losses ' 213

Mailing of returns to collector's ofiice 287, 631

184 INDEX TO REGULATIONS NO. 33, REVISED.

Par.

Maintenance expenses 428

Manufacturing coriwrations, gross income of 354

March 1, 1913, method of determining value as of — : 63

Materials, cost of 430

Mercantile corporations, gross income of 354

Merchandise, computing depreciation of 496

Mines, depletion of 85, 526

Minors :

Additional exemption on account of dependent children 155

Allowances made to 104

Guardians 151, 185, 192, 201, 204

Parent's relation to . 201

Miscellaneous corporations, gross income of 356

Models, drawings, patterns, etc 553

Mortgages, foreclosure of, in connection with bad debts 98

Mutual cyclone, hail, etc., insurance (farmers', etc.) 681

Mutual insurance companies 313, 316

Mutual Insurance companies other than mutual life and mutual marine 704

Capital assets, sale of . 708

Gross Income : 706

Rent income 707

Return ; special form 705

Mutual life companies 685

Mutual marine companies 710

National farm-loan associations ^ 313

Naval officers ; where returns are filed 174

Net income:

Corporations 589

Foreign corporations 590

Individuals 73

Insurance companies 670, 684

New corporations 339, 609, 627

Nonpar value stock in connection with computation of deductible in-
terest 562

Nonresident alien corporations , 309

(See also under Foreign corporations.)
Nonresident alien partnerships:

Dividends on domestic stock 226

War excess-profits tax as a credit to members 140

Nonresident aliens :

Additional tax 158, 160

Agents or representatives of 142, 217, 223

Income accruing from various sources 218

Income in custody or control prior to and subsequent to Oct

3, 1917 219

Credits allowed 138, 141, 216

Deduction of tax at the source 217, 255

Credit for amounts withheld 139

Refund of excess amounts withheld 222

Salaries, wages, commissions, and rents for services rendered
and property located abroad and paid for from income wholly

earned abroad 221

Deductions allowed 129, 141, 216

INDEX TO EEGULATIOKS UO. 33, EEVISED. 185

Nonresident aliens — Continued. Par.

Dividends on domestic stock ; the nonresident alien being tlie actual

but not tile record owner of the stock 226

Dividends as a credit for normal tax 138

Exempt income 220

Fiduciaries acting for 187, 200

Income of, subject to tax 4, 220

Normal tax 157, 159

Property subject to distraint for tax i . 142

Rents for property located abroad and paid for from income wliolly

earned abroad l 221

Returns by and for _- 141, 142, 187, 200, 216

Salaries, etc., for services rendered abroad 221

Specific exemption ; none 217, 255

Stock, sale and delivery of, in United States '. 62

Tax liability , .__ 4, 219

War excess-profits tax as a credit, 140

Notice and demand for tax , 246,252,656

Notice of failure to file return 293

Notice to stockholders of year or years surplus distributed as dividends

was earned 370

Obsolescence in connection, with depreciation 485, 556

Models, drawings, patterns, etc 555

Patents -— 552

Offers In compromise 295

Effect on claim for abatement 739

Oil and gas wells; depletion of 86, 49T'

Depreciation in addition : 510

Operation expenses 428

Orchards . 39, 404

"Outstanding at close of year;" capital stock and indebtedness 565

Ownership certificates :

Foreign items (payable in the United States) , 237

Foreign items; returns of information at the source 239

Interest on domestic obligations ^^ 261

Form 1000 ; no exemption: 262, 264, 603

Form 1001 ; exemption 263, 603

Substitution 265

None In case of Items presented by nonresident alien individ-
uals, firms, corporations, etc 268

When no certificate accompanies item—

Domes|lc items 262

Foreign items (payable in the United States) 237

Paid-up capital stock in connection with computation of deductible

Interest 561

Parent and minor or dependent children 104,155,201

Partnerships :

Common-law partnerships 316

' Fiscal year may be established 214

Foreign nonresident partnersliips—

Domestic dividends ^ 226

Interest on bonds : ownership certificates 263

War excess profits tax as a credit to members , .. 140

186 INDEX TO REGULATIONS NO. 33, EEVISED.

Partnerships — Continued. Par.

Limited partnersliips 305

Losses returned by individual members -- 213

Ownership certificates claiming exemption 263

Profits returned by individual members 211, 213

Return liability 211

Tsjx liability 11, 48, 306

War excess profits tax :

Liability for making return for 211

Proportionate share a credit to individual members 2, 128, 140

Patent rights ; royalties from 384

Patents :

Depletion or depreciation of 552

Obsolescence of 552

Profit or loss resulting from sale of 379, 475

Royalties from rights . 384

Patterns, models, drawings, etc 553

Payment of tax. (See Tax, collection and payment of.)
Penalties :

Ad valorem penalties attach to Income 285

Claims for refund and abatement. (See Claims.)

Delinquency in payment of tax z 246, 279, 656

Claims for abatement; effect of 744

Officer of corporation 657

On return made by commissioner 253

Disclosing contents of returns 651

Failure to file returns on time —

Corporations 296, 633, 638, 643, 645, 658

Officer of corporation 657

Delay in the mail 287, 637

Individuals 253, 281, 296

Offers in compromise 295

Voluntary subsequent filing 291, 643

Waiver after expiration of time limit for assessment 286

False returns —

Corporations ^ 296, 638, 658

Officer of corporation 657

Individuals 1 253, 288, 296

Foreign items ; collection of without obtaining a license 276

Information at the source —

Failure to make return 281

Offers in compromise 295

Payee who is not actual owner of Income refusing to supply

information 240

Specific penalties attach to the person 284

Uncollectible; credit to collectors 715

Preparation of claim 719

Pensions :

Paid by corporations 438

Received by individuals 49

Per diem 55

Permanent improvements 433, 688

Under lease contracts ; 50

PJiilippine Islands, war income tax Jaw not applicable to 669

INDEX TO BEGULATTOSrS NO. 33, REVISED. 187

Par.

Policy losses;. Insurance companies 694

Political subdivision of State defined , 341

Interest on obligations of, is exempt 42, 68, 340

Porto Rico, war Income tax law not applicable to 669

Poultry farms , 404

Power of attorney as related to fiduciaries _; 191

Preferred stock is not interest-bearing indebtedness 560, 570

Premium deposits of insurance companies , 678, 680

Premium income ; insurance companies 665, 701

Life insurance companies 700

President of United States, salary of 72

Profit from sale of property acquired for nominal sum 382

Profit or loss from sale of capital assets by corporation 366, 387

Banks ,„ 352

When paid for in stock or bonds 367, 393, 411

Profit sharing 20

Prorating tax by corporations making returns on fiscal year basis 337

Public utilities whose income inures to benefit of State 313

When income so inures in part only , 450

Railroads operating leased or purchased properties 415

Rates :

Depreciation 485

Interest in computing interest deductible 568

Tax. (See Tax rates.)
Readjustments because of modified Treasury Department interpreta-
tions » 245

Real estate:

Depreciation of, not allowed . 487

Profit and loss from sale of 387

Installment plan 390

Receivers, duties of 181, 621

Record owner versus actual owner of stock in connection with divi-
dends ^ , 224, 599

Records to be kept 278,349

Corporations, open to inspection 639

Recoveries of bad debts 380

Refund claims. (See Claims for refund.)
Refunds :

Amounts withheld at source in 1917 prior to October 3 274

Excess amounts paid in advance on account of tax 249

Nonresident aliens; excess amovmts withheld 222

Reimbursement of expenses ^ 112

Reinsurance by insurance companies 677, 680

Release of amounts withheld at source in 1917 prior to October 3 274

Religious organizations 312

Renewal premiums ^^

Rent:

Dividends in lieu of — -^CS

. , Income of mutual insurance companies -— '''07

Information at the source 233

Interest paid by lessee as part of 571

Nonresident aliens ; ded,uction of tax at the source 221

Residential property "of professional men, 114

188 -INDEX TO REGULATIONS NO. 33, REVISED.

Par.

Reorganization expenses .100

Eepaii-s 432,688

Effect on depreciation 432

Reserves :

Depositors' guaranty funds 45G

Depreciation reserves and dividends 482

Depreciation reserves and tlie investment tliereof 489

Dividends paid from reserves 26, 482

Insurance, reserves for 452

Insurance companies, reserves of 677, 680, 695

Sinking fund for retirement of bonds 492

Trading stamps, redemption of 449

Retired pay 58

Retirement of bonds, losses due to— 467

Returns; administrators or executors 195

Returns ; amended 244, 661

Readjustments due to modification of Treasury Department Interpre-
tations 245

Returns ; citizens or residents 103, 171

Amended returns . . 244

Basis on which made 171

Bookkeeping in connection with returns 167, 171

By whom filed 169

Extension of time for filing 165

Failure to file 253, 281, 291, 296

False return 253, 288, 296

Fqfms on which to make 166

Forwarded to commissioner by collectors 168

Government obligations, interest on 178

Heads of families 169

Husband and wife 182

Inspection of, by beneficiaries . 184

Oil and gas wells ; special statement 512, 519

Penalties —

Failure to file 253, 2S1, 291, 296

False return 253, 288, 296

Offers in compromise 295

Period covered ' 173

Receivers 181

Verification of 175

Vi^hen filed 163

By mail . 286

Where filed ._ 172

Army and Navy officers 174

Returns ; corporations 606

Absence of principal ofiicer 641

Accrual basis 418, 559

Amended returns 426

Application should be made for form 632

Assignees 621

Branch offices 618

By whom filed 606

Calendar year basis unless otherwise established 606, 610

Certified copies of returns « 647

INDEX TO EEGULATIOKS NO. 33, KBVISE0. 189

Returns; corporations — Continued. .Par.

Change of name - C13

Dissolved corporations COS, C12

DissolTGd prior to October 4, 1917 304

Dividend payments 665

Extension of time 640, 642, 648

Failure to file on time 296, 633, 638, 643, 645

Offers in compi-omise : 295

False return 296, 638, 656

Officer of corporation 657

Final return 608, 612

Fiscal year corporations 606, 626

Change from fiscal year to calendar year 634

Change from one fiscal year to another fiscal year 028

Form of' 1 024, 631

Application for form sliould be made if not received from col-
lector ^ 632

Holding companies 417, 616

Information at source. (See Information at the source.)

Inspection of returns 640

Insurance companies 671, 670, 705, 714

Last due date 635

Liquidating corporations 608, 612

Mailed in time to reach collector's office 637

Mining properties ; special statements 543

New corporations 609

Oil and gas wells; special statements —

Lessees 519

Owners who operate 512

Penalties —

Failure to file . 296, 633, 638, 643, 645, 656

Voluntary filing after last due date 643

False return 290, 638, 656

Officer of corporation 657

Offers in compromise 295

Period covered 606, 610

Receivers 621

Secrecy of returns: 651

Sickness of principal officer 641

Stockholders, names and addresses of 665

Subsidiaries ^ 417,614

Sundays and holidays 636

Tentative returns 625

Trustees in bankruptcy 621

Verification of 611

When filed : 600

By mail 637

Last due date defined 635

Sundays and holidays 636

Where filed 632

Returns ; fiduciaries ^- 1^^

Executors or administrators 195

For beneficiary in more than one trust 204

For nonresident aliens: IS'^s 200

190 INDEX TO REGULATIONS NO. 33, EEVISED.

Returns ; fiduciary — Continued. Par.

For trust estates as entities 192

Guardians, trustees, etc 1S5, 202, 204

Of information 204

Returns ; guardians, trustees, etc 185, 202, 204

Returns; information at tlie source. (See Information at ttie source.)

Returns ; insurance companies 671, 676, 714

Mutual insurance companies other than mutual life and mutual

marine '. 705

Returns ; nonresident aliens ; by or for 141, 142, 187, 200, 216

Returns ; partfierships 211

Returns ; record owner of stock, return of dividends when actual owner

is nonresident alien individual or corporation 226, 601

Seturns ; tax withheld at the source 260, 273

Revised Statutes sections referred to:

]8 754

989 773

3176 282, 289, 291, 293

3207 -, 729

3228 756,757

Rights to subscribe to stock 61, 359

Royalties 59, 384

Salary^ (See Compensation.)

Sale of capital assets. (See Capital assets.)

Sales on installment plan 389

Merchandise 395

Real estate 390

Scientific organizations 312

Scrip 43

Secrecy of returns 651

Securities, shrinkage in value of_^ 459, 487

Security investments, dividends paid in 27

Separation agreement allowance 13

Sickness of principal officer of corporation 641

Sinking fund reserves , : 492

Invested in bonds of corporation 577

" Source " defined in connection with income of foreign corporations 310

Specific exemption. (See Exemption, specific.)

Specific penalties attach to person 284

Spending money 434

State, obligations of 42, 6'8, 340

State, officer or employee of 47, 71

Statements to accompany returns, special :

Delinctuent returns voluntarily filed after last due date 644

Letter of transmittal to accompany returns of information at the

source 234

Mining properties 543

Oil and gas well properties 512, 520

Statute of limitations in regard to assessments of taxes 243, 253, 638, 658

Statute of limitations in regard to claims for refund of taxes 756

Exception 757

Stock :

Assessments on, made voluntarily 360

INDEX TO EEGULATIONS NO. 33, BEVISED. 191

Stock — Continued. Par.

Bank, taxes paid on stock for stockholders 118, 581

Stock transferred between assessment and pfiyment of tax 119

Capital assets sold, paid for in stock 367,393,411

Capital stock in connection with deductible interest 561

Common as bonus , 40

Dividends 28, 206, 373

Donation of its stock to a corporation 364

Gift of stock, profit or loss on subsequent disposition 41

Insurance companies, taxes paid on stock for shareholders 696

Issued in exchange for assets of another corporation 367,393,411

Issued in exchange for stock in another corporation 410

Nonpar value in connection with deductible interest 562

Nonresident alien : sale and delivery of stock in United States 62

Original issue, premium and discount 362

Expense incident to sale of 453

Preferred, is not interest-bearing indebtedness , 560, 570

Profits from sale of by stockholders, manner of determining 60

Property exchanged for 381

Record owner versus actual owner 226, 599

Rights to subscribe to 61, 359

Salary paid in stock-.: : 22, 444

Taxes paid on stock for stockliolders 118, 581, 696

Treasury stock 363

Trust certificates 371

Stock dividends 373

Capitalization of appreciation of value of assets 28

Capitalization of good will, trade-marks, etc 28

Fiduciaries, stock dividends received by 206

Stock farms 404

Stock insurance companies 713

Stock trust certificates 371

Stockholders :

Names and addresses of, to be returned by corporation 665

Taxes paid by corporation on capital stock —

Banks 118, 581

Insurance companies 696

Subsidiaries :

Karnings of — 386

Returns by 417, 614

Sale of assets to parent corporation 394

Suits for taxes 658, 726

Claims for sums recovered by 772

Collectors of internal revenue, duties of, in connection with 726

Super tax. (See Additional tax.)

Surety insurance companies 713

rarifC duties 588

'' Taxable net income " defined, in connection with allowable deduction
on account of gifts made by citizens and residents 88

Tax assessment:

Corporations ■- 652

Fractional parts of cents 251

Individuals 242

192 IHTDEX TO EEGTJLATIONS WO. 33, REVISED.

Tax bills : Par.

CJorporations 652

Individuals 242

Tax ; collection and payment of ; corporations 652

Additional assessments ; when paid 655

If voluntarily paid, amended returns or waivers not required 661

Advance payment in whole or in installments > 249

Claims for refund and abatement. (See Claims for refund.)

Debt due to the United States, tax is 248

Extension of time for making return does not correspondingly extend

time for paying tax i 654

Excess payment in one year not an offset (or another year 247

Lien; Government's lien; how completed 252

Notice and demand for tax 656

Penalty for failure to pay 656

Claims for abatement, effect of 744

Officer of corporation 657

On return made by commissioner ^ 253

Suits for taxes 658

Three-year limitation for collection by assessment 638, 658

AVaiver 660

Undistributed profits 667

■\VIien due for calendar year , : 652

When due for fiscal year 653

Tax; collection and payment of; individuals 246

Advance payment in whole or in installments 249

Claims for refund and abatement. (See Claims for refund.)

Debt due to the United States, tax is 248

Excess payment in one year not an offset for anotlier year 247

Lion ; Government's lien ; how completed 252

Xotice and demand for tax 246, 252

Penalty for failure to pay 246, 279

Claim for abatement, effect of 744

On return made by commissioner 253

Three-year limitation in connection with assessment of the tax 243, 253

Waiver 286

When due 246

Ta±-free covenant obligations, interest on:

Equipment-trust or car-trust certificates ^ 576

Income to corporations 401, 593

Tax to be deducted at the source against individuals 255, 256

Exemption claimed 257, 263, 271

Exemption not claimed 262

Tax liability 1, 248, 277

Administrators and executors 197

Citizens and residents 4

Corporations 8, 297, 298

Dissolved prior to October 4, 1917 304

Fiscal-year corporations 337

Foreign corporations 309, 604

Insurance companies 669

Undistributed profits 667

Distributees of estates 198

INDEX TO KEGTJLATIONS NO. 33; REVISED. 193

rsx liability — Continued. Par.

Estates ^ -7, 24, 198

Fiduciaries 185

For nonresident aliens 200

Foreign Governments 348

Nonresident aliens 4, 219

Partnerships 11, 48

Special cases 277

rax rates :

Additional tax 5, 6, 158, 160

Table of amounts and rates 162

Citizens and residents 4-6, 157-160

Corporations 9-, 297, 298, 338

Undistributed profits 10

Estates 7

Foreign corporations 807, 308, 338

■ Nonresident aliens —

Additional tax 158, 160

Normal tax 1 4, 157, 159

Normal -tax —

Citizens and residents = 4, 157, 159

Corporations- 8, 9, 297, 298, 338

Foreign corporations 307, 308, 338

' * Nonresident aliens^^ 4, 157, 159

Undistributed profits of corporations 10

Taxes, deductible or not :

Citizens and residents 79, 116

Corporations 579

Banks ; tax assessed against stock of stockholders . — 118, 581

Insurance-companies ; tax assessed against stock of stockholders. 696

Tax-free covenant obligations . 585

Nonresident aliens '— 132

Taxes' In litigation •.: 726

Taxes, suits for 658, 726

Taxes uncollectible 715

Tenants, amounts expended by : 50, 57, 115, 445

Tentative returns by corporations : '■ 625

Three-year limitation In connection with assessment of the tax_ 243, 253, 638, 658

Waiver - - 244, 286, 660

Timber lands, depletion of 125, 547

Title; "this title" defined— 302

Trade-marks, etc. :

Capitalization of, stock dividends 28

Depreciation of, not allowed-- 495

Trading stamps, redemption of 448

Treasury decisions ; effect of changes, because of modified Treasury De-
partment interpretation 245

Treasury decisions, effective date of : 245

Treasury decisions referred to :

1933 - - - -

1960 "_"-_"— '-'_-'- 562, 563, 567

1993 ^'^'^

'■ 1996 —• ' ^^

194 INDEX TO HEGULATIONS NO. 33, REVISED.

treasury decisions referred to — Continued. P»i.

2001 ; 629

2005 4G0, 471

2016 647

2029 , 629

2077 - 392, 393, 394

2090 322, 325, 327, 333, 437, 450, 571, 587, 610, 612, 620, 629

2121 ^ - - 582, 583

2123 409

2130 :_- 460, 471

2137 389, 392, 393, 394, 446, 451, 470, 488, 590, 610, 613, 620, 625, 629

2152 316, 456, 460, 471, 487, 488, 580, 582, 583, 610

2153 472

2161 i 316, 399, 492, 577, 585, 590, 620

2209 '- ^^ ^ 012

2407 ^ 336

2433 672

2442 50, 417

2447 ■ - 506

2620 368

2662 250

Treasury stock, status of . 363

Trust estates ^ :--—.—- 7, 192, 206, 210

Depreciation __, ^_'_ V9

Trustees. (See Fiduciaries.)

Trustees in bankruptcy to make returns and pay tax— ._„_ 622

Uncollectible taxes . ._ 715

Undistributed profits of corporations :

Subject to additional tax to sharelioUlors 161

Subject to tax to corporation , 667

Manner of determining liability ^-: ^, _: . 668

United States bonds. (See Government bonds.)

Values as of March 1, 1913, manner of determining_,____ i 63

Verification of returns 278, 611

Annual list returns of amounts withheld at source- 260

Annual list returns of information at the source 232, 234

Annual returns of corporations 611

Annual returns of Individuals 175

Voluntary assessments on stock ^ 360

Voluntary filing of returns after last due date 291, 643

Voluntary payment of tax after expiration of the three-year period 661

Wages. (See Compensation.)

Waiver after expiration of time limit of assessment • 244, 286, 660

Not required if tax is paid voluntarily 061

Wax excess profits tax:

As a credit ^ 2, 110, 128, 594

Nonresident aliens 140

Nonresident partnerships, members of .' 140

Corporation dissolved prior to October 4, 1917 304

Interest on Liberty Loan 4 per cent bonds to be Included in com-
puting taxable income 344, 365

Not deductible 79, 116, 132, 579

Partnerships, liability lor jnaking returns 211

INDEX TO KEGULATIONS NO. 33, EEVISET>. 19^5

War Income tax: . Par.

Additional tax 6, 160

Table ot rates ^ , 162

Citizens and residents 4, C, 159, 160

Corporations 9,298,338

Dissolved prior to October 4, 1917 304

Foreign corporations !_ 808

bependjsnt children; additional exemption on account of .- 155

Dividends a credit to corporations! : 9, 298, 372, 592

Exempt corporations :_ 315

Exemption ; specific 148

Additional for dependent children 155

At the source . 271

Foreign corporations . 308, 338

Nonresident aliens —

Additional tax 6, 160

Normal tax not applicable to 4, 159

Normal tax —

Citizens and residents _ 4, 159

Corporations .r: 9, 298, 338

Foreign corporations 308, 338

Nonresident aliens 4, 159

Prorated by corporalions operating on fiscal-year basis _ — 338

Tax-free covenant bonds ; deduction of tax on interest on ._ 271

Warrants :

For payment of claims for refund — 753

In payment for public work done 378

Wells, oil and gas, depletion of 86, 497

Depreciation in addition 510

Lessees 502

Statements to accompany returns — 1 512, 520

Widow :

Husband dying during year 156

Husband's salary paid to, for limited time 440

Wife. (See Husband and wife.)

Withholding the fax at the source _ 254

(See also Deduction of the tax at the source.)
Year, taxable:

Corporations 301, 606, 610, 626

Individuals — '^'^^

Partnerships _, 214

INDEX TO THE INCOME TAX ACTS.

(APPENDIX.)

(References are to sections and pages.]

Sec. Page.

Ldditlonal tax, excess of $20,000 Ifb) 133

period to which applicable 1(c) 134

estates liable for 2(b) 134

income includes undistributed profits 2 135

exemptions detailed 4 i3g

idvance payments in installments 1009 167

L.llowance3(se« Deductions also) -for oil and gas wells..;.'. •.. 5 . 137

for gifts and contributions 5 133

Lsaessments, notige of before June 1 9 142

due on or before June 15 9 143

as to corporations 14 154

Commissioner required to make. Part III 3176 158

(etterments, not deductible 6 139

rommissioner of Internal Revenue —

may require statement 3 135

shall prescribe rules 5 138

may grant extension 8 141

shall make all assessments 9 142

shall prescribe rules and regulations 9, 144

in case of corporation tax 14 154

provides forms and regulations 3173 157

in case of failure to return 3176 158

loUectors of Internal Revenue —

may call for statement of gains, etc 3 135

at Baltimore, Md., shall receive return 8 141

duties as to false returns 3225 155

shall not divulge information 3167 156

shall canvass district. 3172 156

shall verity returns by oath 19 159

shall give receipt. 17 158

may accept certificates of indebtedness 1010 167

lorporations required to withhold normal tax income 9(b) 143

.collecting foreign payments to be licensed 9(f) 144

income tax on, Part II 10 145

conditional and other exemptions 11 146

deductions from gross income 12 148

returns, how computed 13 152

assessment and administration -••_■-■» 1^ 154

general administrative provisions 15

ourts, District, have jurisdiction 20

redita allowed for taxes withheld at source — : 5(c) 138

'eductions of normal tax at source 9(b) 143

leductions, allowed in computing net income. 5 136

on nonresident aliens 6 138

allowed on^ personal exemption 7

in case of corporations 12

of premiums of insurance, not allowed m 32 163

156
160

140
148

198 INDEX TO THE INCOME TAX ACTS.

Sec. Page.

Dividends, included as personal income 1 134

to be included in return 8(f) 142

deducted to pay normal tax 9(b) 143

included in corporate income .". . :....: .- 10 145

defined for corporations .- 31 162

Exemptions (see Deductions) .'.'.. 12 148

of income from law, Title I ■. ..:...'.......; ..;. 4 136

' conditional and others, for corporations. ...;.;.........; 11 146

underTitlel— War Income Tax.... ....;...;.....•..-.. 1 3 165

Failure to make return, penalty of 5 per cent and interest. . . i 9(a) 142

by corporations, penalty for.-. : ; . : ;...;;;.:;; '..■.!„... 14(a) 154

adds 50 per cent to tax. Part III ...; ;.;■.;.'............ 3176 158

makes liable to fine and imprisonment, Title X ;.....;. -..'..: 1004 166

Federal Tarm Loan Act, exempt income from 1 .....'... . 4 136

TPiduciaries (seeTrustees, executors, administrators, etc.)....'....;..:.. 2 135

indemnified against claims. ..;.;:.;.... .'.1 .. T. ..'• 2 ' 135

shall make returns ..-.:;: i. ::-.;:..;;;•.:;:. ; ....'.:::•'.': 8(c)- 141

Gifts, contributions, etc., deductible; • ..;..-.-......;;... 'J-. 5 ' 138

Indebtedness, interes ton deductible -for persons ....;;;.....'...-....':. '. 5 137 '

interest deductible for corporations ...H 1.' li 12 149

Indi-viduals, income tax on. Part I ;..::.....; .'I:.T. ... 1 ' " 133

income defined ;..-....: ; ; 2 ■• 134

additional tax includes undistributed profits...- . ; ; ; . . .- '.i.'.. 3 135

incomes exempted under Title I •...-......-..:' ..;.;;. 4 ' 136

alloi-wable deductions..:;....-......; .....'J:.. 5 ■' 136

allowable credits : ..;;;...;;;..n !..... ":..;.!. 5 ■ 138

dednctions for nonresident aliens....; „.....;..'.. 6 138

- personal exemption :.;.■...; -...;..;'. .i.. '.-!..... . 7 140

returns, how computed 8 140

assessment of tax of 1917. ..;..-.•. '...'i.....; ' 9 142'

Income tax, sourcesincluded'. ...... ....-.„ V... 2 134

includes profits of holding-companies. . ..;....-.;....' 3 135

exemptions specified. ;-.;.;.-.;. .-.-. . . . i ; . .-. . 4 136

deductions of losses, bad debts, etc ..- .... 5 ' 136

creiiits allowed '. ; 5(b) 138

Income of taxable person, how derived; 2(a)' 134

of estates being administered . ...;;.. .-*-.. 2(b) 134

fiduciaries indemnified ^ ■. 2(b) 135

includes undistributed profits ; '. 3 • 135

items exempt from personal tax . ; ; 4 136

deductions allowed -.-. ; 5 136

credits under normal tax only : 5 138

as applying to nonresidents ; 6 138

normal tax exemptions. -....-..-.- 7 • 140

in case of fiduciaries 8(c) 141

in case of partnerships 8(e) 141

Judgments invalidating part of Act of September 8, 1916. . . 900 163

Act of October 3, 1917 1300 168

Life-insurance policies, proceeds to beneficiary exempt A 136

Net income tax, on whom le-vied 1 ■ 133

items constituting .- 2 134

items exempt from law ...-.-..-. ; 4 136

deductions allowed ; 5 136

computed for nonresident aliens 6 138 '

INDEX TO THE INCOME TAX ACTS. 199

Net income, tax on whom levied— Continued. • gee. pago.

personal exemptions 7 14q

period for which computed _ g 140

returns, when to be made 8 141

Nonresident aliens, deductions allowed to 6 1 38

Normal tax, levied on whom i(g\ ^33

period for which computed 1(c) x34

credits allowed for dividends, etc ■ 5 133

* personal exemptions 7 ^40

assessment and administration 9 142

Oaths required, for personal returns 8(b) 141

of corporate officials 13(b) 153

in War Income Tax Returns, Title X 1001 16C

Partnerships, liable in individual capacity 8(e) 141

to deduct normal tax ; g/j,) 143

. not included in corporations 10 145

must make return of income 3173 155

Benalty for fraudulent return , involves misdemeanor 9(f) 144

100 per cent added to tax ." 3176 153

far officers of corporations 18 159

Payment of taxes, when due, personal 9 142

when due, corporation , 14 154

by check 1010 1C7

Personal exemption, on normal tax 7 140

;-Receivers, trustees, etc., to make retiirns , 8(c) 141

1 for corporations •. 13(c) 153

Eetums, personal income tax 8 140

corporation income tax _ 13 152

Secretary of the Treasury, approval of accounts 8(g) 142

regulations by, on collection license 9(g) I44

may impose tax of 15 per cent 10(})) 146

to prescribe rules on allowances. 12(,a) 148

shall regulate access to returns 14(b) 155

Taxable year, for normal and additional taxes 1(c) ] 34

for tax return, personal 8 140

for additional tax, corporation 10(b) 145

for computing net income 13(a) 152

Value, fair market, basis of personal deductions 5 137

basis of losses 6 139

basis of gain or loss 10 145

limit of allowed deductions : 12 148

War Income Tax, on graduated incomes. Title 1 1 164

administrative provisions. Title X 1001 160

general provisions! 1212 168

Withholding at source, required of persons, corporations, etc 9(b) 143

interest on bonds and mortgages (normal) 9(c) 143

• foreign payments of personal dividends, etc 9(f) 144

i' provisions for nonresident aliens 13(e,f) 153

as applying to War Tax Income, Title 1 3 1G5

When to make returns, of personal income tax S(b) 141

of corporate income tax ' 13(b) 152

Where to file, personal return, with collector ■ 8(b) 141

by foreign and domestic corporations 13(b) 152

r- o